Unit - 1 : Marketing: An Introduction

Structure of Unit:

1.0 Objectives
1.1 Introduction
1.2 Meaning and Definition of Marketing
1.3 Key Terms in Marketing
1.4 Nature and Scope of Marketing
1.5 Importance and Significance of Marketing
1.6 Concept of Marketing
1.7 Functions of a Marketing Manager
1.8 Summary
1.9 Self Assessment Questions
1.10 Reference Books

1.0 Objectives

After completing this unit, you will be able to:

• Define marketing, its meaning, nature and scope.

• Know the evolution & development of marketing science  Know the importance and
significance of marketing.
• Explain the difference of selling and marketing.
• Explain the core concepts of marketing.
• Visualize the significance of marketing in the global economy.
• Understand the functions of a marketing manager.
• Describe the managerial activities performed by the marketing managers.

1.1 Introduction

As clearly figured in one of our oldest Upanishad about destiny and in hidden words it is more
about business:
You are what your deep, driving desire is
As your desire is, so is your will
As your will is, so is your deed
As your deed is, so is your destiny
- Brihadaranyaka Upanishad
Many organizations seek success for their business. These successful companies have one thing
quite common - (like HUL, ITC, Shadi.com, DOCOMO and many more) - they are strongly
customer focused and committed to marketing. These companies have a passion for customer
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satisfaction in well identified market. They endeavour to develop strong relationship with the
customer through superior customer value and satisfaction.
These companies share an absolute dedication to sensing, serving and satisfying the needs of
customers. These organizations know that if they take care of their customers, market share and
profits will follow.
Marketing, basically deals with customers more and more. Creating customer value and
satisfaction are at the heart of modern marketing practices. Although we will explore more
detailed definitions of marketing later in this chapter, perhaps the simplest definition of marketing
is here – “Marketing is the delivery of customer satisfaction at a profit.” The goal of marketing is
to attract new customers by promising superior value, and to retain current customers by
delivering delighted satisfaction.
People think that only large companies in high economies use marketing. However marketing is
vital to the success of every organization, whether large or small, domestic or global. In the
business sector, marketing first spread most rapidly in Fast Moving Consumer Goods (FMCG)
companies, consumer durables companies and industrial equipment companies. Within the past
few decades, however, consumer service firms, especially airline, insurance and financial services
companies, have also adopted modern marketing practices. Business groups such as lawyers,
accountants, physicians and architects, too, have begun to take an interest in marketing and to
advertise and to price their services aggressively.
You already know a lot about marketing - it’s all around you. You see the results of marketing in
the abundance of products that line the store shelves in your nearby shopping mall. You see
marketing in the advertisements that fill your TV screen, magazines and mailbox. At home, at
school, where you work, where you play - you are exposed to marketing in almost everything you
do. Yet, there is much more to marketing than meets the consumer’s relaxed eyes. Behind it all is a
massive network of people and activities competing for your attention and currency.
Welcome to the fantastic world of marketing! Marketing is not a new word but inducing feelings
of freshness each time it is used. For there is so much happening in this field that even the oldies
have something new to learn every day. In your class itself, I am sure that there are quite a few
students opting for marketing than any other discipline. Surely, there must be something in this
word marketing that everyone feels attracted to it. Let us move little deeper inside marketing.
Marketing is ancient art. The first marketing transaction can be perhaps attributed to Adam and
Eve. Its emergence as a management discipline is of relatively recent origin. And within this
relatively short period, it has gained a great deal of importance. In fact today marketing is
regarded as most important of all management functions of business. All of us involve in
marketing by any way. Can you describe how the marketing evolved since its inception? It has
taken a long time before marketing reached the stage what it is today!
The term ‘market’ originates from the Latin noun ‘Marcatus’ which means ‘a place where business
is conducted’. For a layman it is a place where the buyers and sellers personally interact and
finalize deals. However for the students of marketing, it has wider and deeper implications. It is
not merely a place of exchange but an arrangement that provides an opportunity of exchanging
goods and services for money. In this context, Philip Kotler has defined the term market as “an
arena for potential exchanges”. Not only does marketing deals with goods and services but it also
focus on ideas, issues, concepts and principles. Marketing encompasses a wide array of business

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decisions that are essential to success nearly of all organizations. Marketing is a key function of
management. It brings success to business organization. A business organization performs two key
functions producing goods and services and making them available to potential customers for use.
Marketing has evolved into every important functional area of management basically due to the
increasing supply and lower demands over the years. When competition increases every firm
wants to be heard in the market. The process of marketing contributes to the achievement of
fundamental objectives of most businesses, which include survival, profitability and growth.
Marketing is a fundamental part of our daily lives. Marketing is thus, the process of planning,
executing the conception, pricing promotion and distribution of ideas, goods and services to create
exchanges (with customers) that satisfy individual and organizational

goals.

Plus

Figure 1.1: Concept of Marketing

Marketing, more than any other business function, deals with customers. Understanding, creating,
communicating, and delivering customer value and satisfaction are at the very heart of modern
marketing thinking and practice. The twofold goal of marketing is to attract new customers by
promising superior value and to keep current customers by delivering satisfaction. Marketing is
basically meeting the unmet needs for target markets and planning to meet them through products,
services and ideas. History of Marketing
Marketing is ancient art. The first marketing transaction can be perhaps attributed to Adam and
Eve. Its emergence as a management discipline is of relatively recent origin. And within this
relatively short period, it has gained a great deal of importance.
It is hard for many to believe, but when compared to economics, production and operations,
accounting and other business areas, marketing is a relatively young discipline having emerged in
the early 1900s.The study of marketing led sellers to recognize that adapting certain strategies and
tactics could significantly benefit the seller/buyer relationships.
But starting in the 1950s companies began to see that old ways of selling were not working. As
competition grew stiffer across most industries looked to the buyer side of the transaction for ways
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to improve. This philosophy suggested that the key factor in successful marketing understands the
need of the customers. Marketing concept suggests marketing decisions should flow from first
knowing the customer and what they want. Only than should an organization initiate the process
of developing and making products and services.
Marketing has come a long way from being recognized as a function of an organization in India.
Marketing is used for customer satisfaction and customer services play a vital role in the economy.
The following persons contributed to the development of Marketing thought:
1920: Cherington
1951: Alderson
1954: Drucker
1956: Hensen
1960: Levitt
1960: McCarthy
1969: Kotler and Levy
1980: Porter
1982: Peters and Waterman

1.2 Meaning and Definition of Marketing

Today, marketing must be understood not in the old sense of making a sale—”telling and
selling”—but in the new sense of satisfying customer needs. Marketing continues throughout the
product’s life, trying to find new customers and keep current customers by improving product
appeal and performance, learning from product sales results, and managing repeat performance.
Marketing originates with the recognition of a need on the part of a consumer and terminates with
the satisfaction of that need by the delivery of a usable product at the right time, at the right place
and at an acceptable price. Marketing is so basic that it cannot be considered a separate function.
It is really the whole business seen from the point of view of the final result, i.e., from the point of
view of the customer.
Modern definition of marketing says: “Marketing is a total system of business, an ongoing process
of:
(1) Discovering and translating consumer needs and desires into goods and services.(through
product planning and producing the planned product).
(2) Creating demand for these products and services(through promotion and pricing)
(3) Serving the consumer demand (through planned physical distribution) with the help of
marketing channels and then, in turn
(4) Expanding the market even in the face of keen competition”.

In short, modern marketing begins with the customer, not with the production cost, sales,
technological landmarks and it ends with the customer satisfaction and social well-being. Under
this approach the customer is the boss. Marketing is defined as an ongoing process for the creation
and delivery of standards and styles of life.

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Marketing Covers:

• Seeking: It is the first function. The purpose of seeking is to discover the customer and
customer needs. This information is revealed through an analysis of the environment.

• Matching: In this process the customer demand has to be matched with organizational
resources and environmental limitations, such as competition, government regulations,
general economic conditions and so on.

• Programming: The marketing programme, called the marketing mix covering product,
price, promotion and distribution strategies (4 P’s) will be formulated and implemented to
accomplish the twin objectives of customer-satisfaction and profitability.
Marketing originates with the recognition of a need on the part of a consumer and terminates with
the satisfaction of that need by the delivery of a usable product at the right time, at the right place
and at an acceptable price. Marketing is so basic that it cannot be considered a separate function.
It is really the whole business seen from the point of view of the final result, i.e., from the point of
view of the customer.
What does the term marketing mean to us? Many people think of marketing is only as selling and
advertising. Generally, marketing is understood to mean the sale and purchase of goods and
services. In today’s sense it is narrow thinking to understand it so. The term ‘marketing’ is very
wide. It is not only the sale and purchase goods and services but the earlier process of satisfying
the needs of the customers. It is more about satisfying customer needs.
Marketing is termed as a social and managerial process by which individuals and groups find what
they need and want through creating aim exchanging products and value with others.
Following are some ways how experts have defined marketing:

“The aim of marketing is to make selling superfluous. The aim is to know and understand the
customer so well that the product or service fits him and sells itself. Ideally marketing should
result in a customer who is ready to buy.” - Peter Drucker
“Marketing is the activity, set of institutions, and processes for creating, communicating, delivering,
and exchanging offerings that have value for customers, clients, partners, and society at large.”
-American
Marketing Association. (Oct, 2007) “Marketing is the delivery of standard of living to the
Society.”
-Prof. Paul
Mazur
“Marketing is getting someone who has a need to know, like and trust you.”
-Jon
Jantsh“Marketing is the human activity directed at satisfying needs and wants through an
exchange process.”
-Philip Kotler
“Marketing is the management process for identifying, anticipating & satisfying customer
requirements profitably.”
-The Chartered
Institute of Marketing“Marketing Management is the branch of the broad area of management.

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Marketing Management is concerned with the direction of purposeful activities toward the
attainment of marketing goods.”
-Cundiff &
Still“Marketing is the process of anticipating, managing and satisfying the demand for products,
services, and ideas.”
-Wharton
School of Management

Marketing is the economic process by which goods and services are exchanged between the
producer and the consumer and their values determined in terms of money prices.

1.3 Key Terms in Marketing

Marketing as a social and managerial process whereby individuals and groups obtain what they
need and want through creating and exchanging products and value with others. To explain this
definition, we will examine the following important terms: needs, wants, and demands; products
and services; value, satisfaction, and quality; exchange, transactions, and relationships; and
markets.

Key Terms in
Marketing

Figure 1.2: Key Terms in Marketing

Need: Human needs are states of felt deprivation. They include basic physical needs for food,
clothing, warmth, and safety; social needs for belonging and affection; and individual needs for
knowledge and self-expression. These needs were not invented by marketers; they are a basic part
of the human makeup.

• Physical needs: Food, clothing ,shelter  Social needs:

Belongingness, affection
• Individual needs: Knowledge, self-expression
Wants: Wants are the form human needs take as they are shaped by culture and individual
personality. An American needs food but wants a hamburger, French fries, and a soft drink. Wants
are shaped by one’s society and are described in terms of objects that will satisfy needs.
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Demands: People have almost unlimited wants but limited resources. When backed by buying
power, wants become demands. Consumers view products as bundles of benefits and choose
products that give them the best bundle for their money. A Honda Civic means basic
transportation, affordable price, and fuel economy; a Lexus means comfort, luxury, and status.
Given their wants and resources, people demand products with the benefits that add up to the most
satisfaction.
Products and Services: Consumers usually choose from a tremendous variety of goods or
services to satisfy a need or want. A product is anything that can be offered to a market to satisfy a
need or want. The concept of product is not limited to physical objects—anything capable of
satisfying a need can be called a product. In addition to tangible goods, products include services,
which are activities or benefits offered for sale that are essentially intangible and do not result in
the ownership of anything.
Examples include banking, airline, hotel, tax preparation, and home repair services.

Value, Satisfaction, and Quality: Customer value – Difference between the values the customer
gains from owning & using a product & the costs of obtaining the product.
Customer satisfaction – With a purchase, how well the product’s performance lives up to the
customer’s expectations. Customers expectations must be set at the right level of expectations,
neither too low or too high. Customer Value & Satisfaction are key building blocks for developing
& managing customer relationships.
Exchange, Transactions, and Relationships: Marketing occurs when people decide to satisfy
needs and wants through exchange. Exchange is one of the core concepts of marketing. It is the
process of obtaining a desired product from someone by offering something in return.
A transaction is a trade of values between two or more parties. It involves two things:

• Time of agreement
• Place of agreement
Transaction marketing is part of the larger idea of relationship marketing. Beyond creating short-
term transactions, marketers need to build long-term relationships with valued customers,
distributors, dealers, and suppliers. They want to build strong economic and social connections by
promising and consistently delivering high-quality products, good service, and fair prices.
Beyond simply attracting new customers and creating transactions, the goal is to retain customers
and grow their business with the company.
Markets: The concepts of exchange and relationships lead to the concept of a market. A market is
the set of actual and potential buyers of a product. These buyers share a particular need or want
that can be satisfied through exchanges and relationships.

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 Figure1.3: A Simple Marketing System
Economists use the term market to refer to a collection of buyers and sellers who transact in a
particular product class, as in the housing market or the grain market. Marketers, however, see the
sellers as constituting an industry and the buyers as constituting a market.
The relationship between the industry and the market is shown in the above fig. Sellers and the
buyers are connected by four flows. The sellers send products, services, and communications to
the market; in return, they receive money and information. The inner loop shows an exchange of
money for goods; the outer loop shows an exchange of information.
Marketers are keenly interested in markets. Their goal is to understand the needs and wants of
specific markets and to select the markets that they can serve best. In turn, they can develop
products and services that will create value and satisfaction for customers in these markets,
resulting in sales and profits for the company. The difference between marketing and selling is
listed below:

Basis of Difference Marketing Selling

Principle The principle of ‘Caveat Vendor’ is The principle of ‘Caveat Emptor’

followed. is followed

Origin Marketing is a new approach. Selling is a traditional word.

Activities It includes the entire process of It includes only the

discovery and satisfaction of physical distribution in of
consumer needs. goods and services.

Scope Marketing includes the Selling is limited only to the

performance of many physical distribution.
allied activities also.

Orientation Marketing is customer oriented. Selling is product oriented.

Target The aim of marketing in to satisfy The aim of sales is to earn

customer needs. maximum profits.

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 Approach to Profit It stresses upon maximization of It stresses upon maximization of
profits through max social profit through maximum of sales.
satisfaction.
T he concept of markets finally brings us full circle to the concept of marketing. Marketing means
managing markets to bring about exchanges and relationships for the purpose of creating value
and satisfying needs and wants. Thus, we return to our definition of marketing as a process by
which individuals and groups obtain what they need and want by creating and exchanging
products and value with others.
Marketers are keenly interested in markets. Marketing means managing markets to bring about
profitable exchange relationships. Exchange processes involve work. Sellers must search for
buyers, identify their needs, design good products and services, set prices for them, promote them,
and store and deliver them. Activities such as product development, research, communication,
distribution, pricing, and service are core marketing activities.

Figure1.4: Main Forces in Modern Marketing System

The above fig1.4 shows the main elements of the modern marketing system. Marketing involves
serving a market of end users in the face of competitors. The company and the competitors send
their respective products and messages to consumers either directly or through marketing
intermediaries to the end users. All of the actors in the system are affected by major environmental
forces (demographic, economic, physical, technological, political–legal, social–cultural).
Marketing Management is the analysis, planning, implementation, and control of programs
designed to create, build, and maintain beneficial exchanges with target buyers for the purpose of
achieving organizational objectives.

1.4 Nature and Scope of Marketing

The basic nature or characteristics of marketing can be understood as follows:

• Customer – oriented: Marketing keeps its main focus on the customers. It aims at
discovering the needs and wants of the customers and then matching them with the products
and services.

• Futuristic: Marketing aims at discovering the future requirements with the appropriate
research methods and considering the latest trends and technological changes to be occur in
the marketing environment.

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• Operational: Marketing is an ongoing process which believes on the statement “no pains no
gains”. It starts with the invention of the concept and need and goes even till after sales.

• Value- Driven: The culture of the marketing firm is based on a desire to build the business
through meeting the needs and responding to the market where the values espoused by firm’s
leaders are communicated to all those involved in the firm.

• Mutual- benefit: Marketing is a broad concept encompassing the requirements of the

customers and matching them with the economies of the company. Both the marketer and the
customer benefit through supply of quality goods and services in return for profit.

• Focuses both Profit and Non-profit Organizations: Marketing is now not only restricted
only to profit making enterprises but also covers non-profit making enterprises like churches,
temples, orphanage, crèches, hospitals, etc.

• Marketing is Collaboration: The nature of marketing requires marketing managers and

professionals to work together on all aspects of marketing. It is common for the marketing
manager to be at the center of a set of activities being worked on by people within the
company (sales force, promotion manager, product development teams, etc.) and outside the
company (ad agencies, consultants, marketing research firms, etc).
Thus marketing managers must spend considerable time in consultation and collaboration with
other people.

The nature of marketing can be understood as:

(1) Marketing is the most important function of management.
(2) Marketing is both customer-oriented and competitors-oriented.
(3) It starts with consumers and ends at consumers by satisfying their needs.
(4) The long-term objectives of marketing are profit maximization through consumer-
satisfaction.
(5) It is an integrated process which is based on strategies and models.
(6) It is a legal process by which ownership is transferred.
(7) It is a system of interacting business activities
(8) It is a managerial function of organizing and directing business activities that facilitates the
movement of goods from producers to consumers.
(9) It is a philosophy based on consumer orientation and satisfaction
Scope of Marketing
The scope of marketing is very wide and it can be analyzed in terms of marketing functions. A
number of marketing functions are performed in the marketing process and these functions are to
be performed on the basis of various utilities.
Marketing functions are divided under three categories:
• Functions of Exchange
• Functions of Physical Distribution
• Functions of Facilities

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All these functions are further divided under different sub parts. Let us define all these functions.
(A) Functions of Exchange
(1) Buying Function: Function of buying is done at various levels like a manufacture is
required to buy raw materials for production purposes. A wholesaler has to buy goods from
manufacturer for purpose of sales to the retailer. A retailer has to sell the goods to
consumers. Thus functions of buying have to be performed at various levels.
(2) Assembling Function: Assembling is different and separate from buying. Buying involves
transfer of ownership of the goods from seller to the buyer; whereas in assembling, goods
are purchased from various sources and assembled at one place to suit the requirements of
the buyer.
(3) Selling Function: Selling involves transfer of ownership from seller to buyer. Selling
function is vital to the success of any firm. Its importance has been continuously
increasing in all organizations due to the emergence of serve competition. Producing goods
is easy but selling those products is very difficult.
(B) Functions of Physical Distribution
(1) Transportation: It includes decision to be taken on mode of transport, by which the
product will be available to the final customers with service selection, carrier routing etc.
(2) Inventory Management: This includes
- Short-term sales forecasting
- Product mix at stocking points
- Number, size and location of stocking points
(3) Warehousing: It includes the following functions
- Space Determination
- Stock layout and design
- Stock placements
(4) Material Handling: This includes
- Equipment selection
- Equipment replacement
- Order picking procedure
- Stock storage and retrieval

(C) Functions of Facilities

(1) Financing: The importance of extending liberal credit facilities as a selling tool cannot be
underestimated. This would necessarily involve higher working capital requirements.
Therefore a marketer can plan for various kinds of finance: Short-term finance, medium-
term finance and long-term finance. There are various sources of financing like:
commercial banks, cooperative banks, credit societies, government agencies, etc.
(2) Risk-taking: There are innumerable risks which a marketing enterprise has to bear in the
process of marketing of goods and services. Risks arise due to unforeseen circumstances.
Risks can be insured also. Like risk due to fire and accidents may be covered by insurance.
But the risks due to increased competition, technological risks business cycles and changes
in government policies cannot be insured.

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 (3) Standardization: The basic concept of marketing is to satisfy the customer needs and to
retain the customers. Buyers and sellers always prefer to have standardized goods and
services. This will relieve buyers from examining the product and wasting time. That is
why standardization has now been accepted as a convenient and ethical basis of marketing.

(4) After-sale Service: The importance of after-sale service as an important tool in marketing
cannot be ignored. Hence arrangement of after sale service has become increasingly
important function. Therefore a marketer has to plan for after sale service. For example,
repairs, replacements, maintenance etc.

1.5 Importance and Significance of Marketing

Marketing is a very important aspect in business since it contributes greatly to the success of the
organization. Production and distribution depend largely on marketing. Since the goal of
marketing is to make the product or service widely known and recognized to the market,
marketers must be creative in their marketing activities. In this competitive nature of many
businesses, getting the product noticed is not that easy.
Marketing management involves choosing target markets that not only get new customers but also
retain the existing ones. It is a business subject, which is based on research and study of practical
applications of marketing techniques and management of the marketing resources. Many people
think that sales and marketing are basically the same. These two concepts are different in many
aspects. Marketing covers advertising, promotions, public relations, and sales. It is the process of
introducing and promoting the product or service into the market and encourages sales from the
buying public. Sales refer to the act of buying or the actual transaction of customers purchasing
the product or service.
The one who excels in this field is known as marketing manager. The job of the marketing manager
is to influence the timing and level of customer demand so as to help the sales. It actually depends on
the size of the business and environment in the corporate industry. The business must be centered on
the customers more than the products. Although good and quality products are also essential, the
buying public still has their personal preferences. Creating and communicating best customer values
can increase the number of customers. The steps taken and resources utilized to maintain existing
customers and get new customers fall under marketing management. The scope is quite large because
it not only consists of developing a product, but also retaining it.
Marketing Promotes Product Awareness to the Customers
Various types of marketing approaches can be utilized by an organization. All forms of marketing
promote product awareness to the market at large. Offline and online marketing make it possible
for the people to be educated with the various products and services that they can take advantage
of. A company must invest in marketing so as not to miss the opportunity of being discovered.
Marketing Helps Boost Product Sales
Apart from public awareness about a company’s products and services, marketing helps boost
sales and revenue growth. Whatever your business is selling, the more people hear and see more
of your advertisements, the more they will be interested to buy.

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Marketing Builds Company Reputation
In order to conquer the general market, marketers aim to create a brand name recognition or
product recall. This is a technique for the consumers to easily associate the brand name with the
images, logo, or caption that they hear and see in the advertisements.For example, McDonalds is
known for its arch design which attracts people and identifies the image as McDonalds.
Marketing plays a very essential role in the success of a company. It educates people on the latest
market trends, helps boost a company’s sales and profit, and develops company reputation. But
marketers must be creative and wise enough to promote their products with the proper marketing
tactics.
Marketing performs a number of activities like:
• It identifies marketing opportunities
• It manages existing products and develop new products
• It chooses and motivates channels of distribution  It advertises and
promotes products and services
• It sets prices and terms of supply  It plans the marketing activity.

1.6 Concept of Marketing

The philosophy of marketing which has evolved as marketing management has passed through
distinct stages. The orientations of the companies have been changing from production to societal
through product, sales, marketing. There are five alternative concepts under which organization
designs and carry out their marketing strategies: the production, product, selling, marketing and
societal marketing concepts.

Figure1.5: Core Concept of Marketing Philosophies

a. Production Concept: The production concept prevailed in late 1920s.This concept

holds that the consumer will favor only those products that are widely available and low
in cost. The production concept was the idea that a firm should focus on improving

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 production and distribution efficiency. At that time this concept worked fairly well,
because the goods that were produced were largely those of basic necessity and there was
a relatively high level of unfulfilled demand.
b. Product Concept: The product concept says that consumers will favor those products
that offer the most quality, performance and innovative features. Under this concept, the
marketing strategy should focus on making continuous product improvements.
This concept can lead to Marketing Myopia, a term coined in 1960 by Theodore Levitt-
‘Myopia means shortsightedness or lack of discernment in thinking or planning.’
The problem with this orientation is that the managers forget to read the customers mind
and launch products. Innovative products are launched without educating the customers
about the innovation and the probable advantage that the customer is going to get.

c. Selling Concept: By the early 1930’s however, mass production had become
commonplace, and the competition increased. At this time the firm began to practice the
selling concept under which firms not only would produce the products, but also would
try to convince customers through advertising and promotional efforts.
This approach is applicable in the cases of unsought goods like life insurance, vacuum cleaner,
fire fighting equipments including fire extinguishers. This concept is applicable for the firms
having over capacity in which their goal is to sell what they produce than what the customer really
wants. The approach paid little attention to the need of the product, the goal simply was to beat
the completion to the sale with little regard to customer satisfaction.
The selling concept and the marketing concept are sometimes confused. The fig. below compares
the two concepts. The selling concept takes an inside-out perspective. It starts with the factory,
focuses on the company’s existing products, and calls for heavy selling and promotion to obtain
profitable sales. In contrast, the marketing concept takes an outside-in perspective. The marketing
concept starts with a well-defined market, focuses on customer needs, coordinates all the
marketing activities affecting customers, and makes profits by creating long-term customer
relationships based on customer value and satisfaction. Thus, under the marketing concept,
customer focus and value are the paths to sales and profits.

Figure 1.6: The Selling and Marketing Concept

d. Marketing Concept: The concept holds that the achieving organizational goals depend on
knowing the needs and wants of target markets and delivering the desired satisfaction

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 better than the competitors do. Under this concept, customer focus and value are the paths
to sales and profit
The Marketing Concept proposes that the reason for success lies in the company’s ability
to create, deliver and communicate a better value proposition through its marketing offer in
comparison to the competitors for its chosen target market.
Many successful and well-known companies have adopted the marketing concept. Procter
& Gamble, Disney, Wal-Mart, Dell Computer, and Southwest Airlines follow it faithfully.
The goal is to build customer satisfaction into the very fabric of the firm.
The key Questions for this concept changed and became customer-oriented like:

• What do customers want?

• How could we keep our customers satisfied?
After this concept the companies focused on customer needs and satisfaction. They started
developing products which can fulfill the needs of the customers.

e. The Societal Marketing Concept

The societal marketing concept is the newest of the five marketing management
philosophies the societal marketing concept holds that the organization should determine
the needs, wants, and interests of target markets. It should then deliver superior value to
customers in a way that maintains or improves the consumer’s and the society’s well being.
The societal marketing concept questions whether the pure marketing concept is adequate in an
age of environmental problems, resource shortages, rapid population growth, worldwide economic
problems, and neglected social services.
According to the societal marketing concept, the pure marketing concept overlooks possible
conflicts between consumer short-run wants and consumer long-run welfare.

Figure 1.7: The Societal Marketing Concept

Such concerns and conflicts led to the societal marketing concept. As Figure 1.5 shows, the
societal marketing concept calls on marketers to balance three considerations in setting their
marketing policies: company profits, consumer wants, and society’s interests. Eventually, they
began to recognize the long-run importance of satisfying consumer wants, and the marketing
concept emerged.

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1.7 Functions of a Marketing Manager

In order to reach the goal of creating a relationship that holds the value for customers and for the
organization marketing managers use a diverse set of options that include decision making with
regard:
 Target Market: Markets consist of customers identified as possessing needs the marketer
believes can be addressed by its marketing efforts. A target market is a group of customers
at whom the company intends to aim its marketing effort. An organization starts its
marketing planning by selecting and analyzing its target market, out of the total market.

Figure 1.8: Functions of Marketing Manager

• Product/Service: Goods and services available in the market place are the means by which
we satisfy our needs. Product is a comprehensive term that includes both goods and
services. Anything that satisfies needs and wants of the customer qualifies to become the
product. Products are a bundle of benefits and services.

• Promotion: A means for communicating information about the marketing’s organization

products to the market. It is the link between the company and the outside public.
Promotion itself is a combination of advertising, personal selling, publicity and public
relations.

• Distribution: It is the process of getting the right products to the right places, at the right
time, in the right size or quantities and in the condition expected by the consumer, yet at
the lowest possible cost. Placing the product is the bridging of the gap between the
producer and consumer, a gap that can be vast, such as with petroleum that is shipped
across oceans.

• Pricing: The price is an agreement between seller and buyer concerning what each is to
receive. Price is the mechanism or device for translating into quantitative terms the
perceived value of the product to the consumer at a point of time. Pricing is equivalent to
the total product offerings.

16
Each option within the marketer’s set is tightly integrated with all other options so that a decision
in one area could and often does impact decisions in other areas. With these basic functions the
managers also do various important functions too.Marketing managers or officers are focused
mainly on the practical application and management of an organization’s marketing operations.
For marketing managers to be efficient and effective in performing their functions, they should
have excellent communication and analytical skills. In small organizations, the marketing manager
is in charge of the organization’s entire marketing activities and therefore handles formulating,
directing and coordinating marketing activities so as to influence customers to choose the
organization’s products over those of competitors.
Some functions of marketing managers are listed below:

(1) Conducting Market Research: Marketing managers carry out market research to gain a
clear understanding of what an organization’s customers really want. Marketing research
enables these managers to identify new market opportunities, helping the organization
create a market niche for its products or services. Market research also involves studying
the organization’s competitors so as to develop superior products and employ efficient
marketing techniques. Companies conduct market research using questionnaires, face-to-
face interviews or analyzing the buying habits of consumers.

(2) Developing the Marketing Strategy: Marketing managers are responsible for developing
marketing strategies for their organizations. These strategies outline clearly how an
organization will promote its products and services to its target market with an aim of
increasing its sales volumes and maintaining a competitive edge over its competitors.

(3) Customer Relationship Management: The marketing manager performs the function of
championing customer relationship management in the organization. The marketing
manager collects this information from the organization’s customer database to help create
a customer satisfaction survey. Marketing managers then share this information with other
employees to ensure they offer excellent customer service to their clients in order to build
lasting relationships.

(4) Employee Management: Marketing managers are in charge of the marketing department
and therefore are responsible for employees within their department. They assign duties
and set targets for departmental staff. It is also the function of marketing managers to
perform periodic performance evaluations of the staff working for them.

(5) Identifying New Business Opportunities: Marketing managers analyze market trends
with an aim of identifying unexploited or new markets for the organization’s products and
services. Through studying the purchasing patterns of consumers, they can identify the
peak and off-peak demand periods for their products. By employing sales forecasting, they
can estimate future performance of the organization’s products. Also through market
analysis and forecasting, they can develop strategies to ensure the organization remains
competitive.

1.8 Summary

17
Marketing as a social and managerial process whereby individuals and groups obtain what they
need and want through creating and exchanging products and value with other. The core
marketing concepts are needs, wants and demands; marketing offers (products, services and
experiences); value& satisfaction; exchange, transactions and relationships; and markets. It is
really the whole business seen from the point of view of the final result, i.e., from the point of
view of the customer.
The nature of market suggests that marketing is an economic function of exchange, with a legal
process by which the ownership is transferred. Marketing is basically based on customer
orientation with dual objectives of profit-maximization and customer satisfaction.
The scope of marketing consists of studying the customer’s needs and wants the buying behavior,
product planning and development, pricing, promotion, distribution, customer satisfaction and
marketing control. It is very important as it promotes product awareness to the customers,
increases the sales and helps in building company reputation.
There are five alternative concepts under which organization designs and carry out their marketing
strategies: the production, product, selling, marketing and societal marketing concepts. Nowadays
the orientation of the companies has shifted towards the marketing and societal marketing
concepts. The basic function of the marketing manager is to take decisions for the following
diverse set of options; target markets, the pricing policies, promotion, distribution and all the
supporting activities.

1.9 Self Assessment Questions

1 What is marketing? Explain its nature and scope.

2 What are the various marketing concepts? Which should be adopted in the present scenario
and why?

3 What is a marketing system? What are its components?

4 Describe the evolution of marketing concept. What are the benefits of marketing concepts?

5 Discuss the significance and importance of Marketing.

6 What are the functions of a Marketing Manager?

7 Explain with examples how marketing is different from selling.

8 Marketing helps in need fulfillment and satisfaction. Throw light on this sentence.

9 Marketing is important for the company as well for the society, elaborate with reference to
Indian context.
10 All the functions performed by a marketing manager are interrelated. Explain with
examples.

1.10 Reference Books

18
 Armstrong/ Kotler (2007), “Marketing: An Introduction”(seventh edition)Published by
Dorling Kindersley (India) Pvt. Ltd, licenses of Pearson Education in South East Asia.

 Kotler, Philip. “Marketing Management”. Prentice Hall of India, New Delhi.

 Ramaswamy, V.S. and Namakumari, S. “Marketing Management, Planning and Control”.
Macmillan India Ltd., New Delhi.

 Dr.Kapil Sharma(2009), “Marketing Management” Global India Publications Pvt. Ltd, New
Delhi.

- Philip Kotler, Kevin Lane, Abraham Koshy, Mithileshwer Jha, “Marketing, A south Asian
Perspective”, Pearson Education, 2009.

Unit - 2 : Marketing Environment

Structure of Unit:

2.0 Objectives
2.1 Introduction
2.2 Need and Importance of the Analysis of Marketing Environment
2.3 Meaning and Definitions of Marketing Environment
2.4 Elements of Marketing Environment
2.5 Summary
2.6 Self Assessment Questions
2.7 Reference Books

2.0 Objectives

After completing this unit, you will be able to:

• Know the features of the marketing environment that influences marketing strategy
• Define the marketing environment
• Analyze the impact of external environment on the firm
• Explain the types of environment
• Define the social factors affecting the market
• Explain the technological trends and its impact on the firm
• Know the impact of political and legal environment on marketing
• Describe the need for environmental analysis
• Understand the need of new perspective in marketing

2.1 Introduction

All business organizations operate in an environment. The environment has several distinct
components: political, legal, social, technological and others. Business activities should be
19
adjusted to these components of the environment and changes in these components. The
environment is constantly changing.
Marketing involves the challenging task of ensuring the ongoing survival and growth of profit-
seeking organizations in a highly competitive market. Because the modern organization has
existed in an extremely unsteady environment in the past decade or two, a market can only survive
if they know what is going on in the environment. Marketing environment is a component of
business environment that directly or indirectly influences the company’s capacity to promote and
perform efficient operations on the market.
Most of the successful companies have now realized that marketing process is a never-ending
series of opportunities and threats. Marketing environment analysis is the process of gathering,
filtering and analyzing information relating to the marketing environment. Involved in the process
is the task of monitoring the changes taking place in the environment and forecasting the future
position in respect of each of the factors. The analysis spots the opportunities and threats in the
environment, and pinpoints the ones that are specifically relevant to the firm No business is so
great that they can bring change in the environment, they are just the adapters. The variables that
operate within the organization have a direct or indirect influence on their working. A successful
organization is one, which understands, can anticipate and take advantage of changes within and
outside their environment.
Marketing environment is divided in to two broad categories- microenvironment, that is specific
to the given business, and macro environment, specific to the overall industry. The firm covers
both these parts in its environmental analysis. Thus now you can say, marketing environment
analysis involves the diagnosis of the mega environment as well as the environment that is
specific to the given business.
• Micro-Environment: The factors that influence directly the ability of the company to
achieve an offer standard desired by the customers.
• Macro-Environment: Factors that affect the society as a whole and influence the
company indirectly.
In marketing environment analysis a firm gathers relevant information relating to the environment,
studies them in detail take note of the changes in each element of the environment and forecasts the
future position in each of them.

2.2 Need and Importance of the Analysis of Marketing Environment

Environmental analysis attempts to give an extensive insight as to the current market conditions as
well as of the impact of external factors that are uncontrollable by the marketers. These variables
play an important role in convincing potential customer regarding change in market trends,
conditions etc. This is the process of gathering, analyzing and forecasting of external
environments’ information to identify opportunity and threats that a company faces.
Purpose of Analysis of Marketing Environment

- To know where the environment is heading; to observe and size up the relevant events and
t rends in the environment.

20
 - To discern which events and trends are favorable from the stand point of the firm, and
which are unfavorable.
- To figure out the opportunities and threats hidden in the environmental events and trends.
- To project how the environment-each factor of the environment will be at a future point of
time.
- To assess the scope of various opportunities and shortlist those that can favorably impact
in business. - To secure the right fit between the environment and the business unit, which
is the crux of marketing.
- To help the business unit respond with matching product-market strategies, in the right
way in line with the trends in the environment and the opportunities emerging there in.
In analyzing the environment, Johnson and Scholes suggested five stages of environmental
analysis which are as given below:
• Audit of environmental influences
• Assessment of the nature of the environment
• Identification of the key environmental forces
• Identification of the principal opportunities and threats
• Strategic position
After scanning the environment, the marketer has to handle the different environmental
conditions.
Importance of Environmental Analysis
The environment of business is not static. The marketing manager needs to be dynamic to
effectively deal with the changing environment. The following benefits of environmental scanning
have been suggested by various authorities:
1. It creates an increased general awareness of environmental changes on the part of
management.
2. It guides with greater effectiveness in matters relating to government.
3. It suggests improvements in diversification and resource allocation.
4. It helps firms to identify and capitalize upon opportunities rather than losing out to
competitors.
5. It provides a continuing broad-based education for executives in general, and the
strategists in particular.
Marketing management is concerned with matching of the organization with the demands of the
business environment. There is a need for the marketer to monitor the business environment on an
on-going basis so that opportunities and threats facing the organization are identified and
subsequently reflected in the firms’ strategy.

2.3 Meaning and Definition of Marketing Environment

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Marketing environment comprises of the combination of two words ‘marketing’ and
‘environment’. Marketing means responding to the needs and demands of the consumers to
provide optimum satisfaction. Similarly environment refers to external factors influences and
organizational power which is related to the aim and effective working of a firm. Thus marketing
environment refers to external or macro factors and forces which not only influence a company
but also the components which affect the consumers analyzing its trend and impact on the
operations and performance of the company.
The marketing environment surrounds and impacts upon the organization. There are three key
perspectives on the marketing environment, namely the ‘macro-environment,’ the ‘micro-
environment’ and the ‘internal environment’.
Micro Environment
This environment influences the organization directly. It includes suppliers that deal directly or
indirectly, consumers and customers, and other local stakeholders. Micro tends to suggest small,
but this can be misleading. In this context, micro describes the relationship between firms and the
driving forces that control this relationship. It is a more local relationship, and the firm may
exercise a degree of influence.

Figure. 2.1 : Micro Environmental Factors

Micro environmental factors are internal factors close to a business that have a direct impact on its
strategy. These factors include:
Customers: Organizations survive on the basis of meeting “customer needs and wants” and
providing benefits for their customers. Failure to do so will result in a failed business strategy.
Suppliers: Suppliers provide businesses with the materials they need to carry out their business
activities. A supplier’s behavior will directly impact the business it supplies.
Shareholders: As organizations require inward investment to grow, they may decide to move
from private to public ownership and list on the stock market. Relationships with shareholders
need to be managed carefully as rapid short term increases in profit could detrimentally affect the
long term success of the business.
Media: Positive media attention can “make” an organization (or its products) and negative media
attention can “break” an organization. Organizations need to manage the media so that the media

22
help promote the positive things about the organization and conversely reduce the impact of a
negative event on their reputation.
Competitors: The name of the game in marketing is differentiation. Can the organization offer
benefits that are better than those offered by competitors? Competitor analysis and monitoring is
crucial if an organization is to maintain or improve its position within the market. As a business it
is important to examine competitors’ responses to these changes so that you can maximize the
impact of your response.
Macro Environment
This includes all factors that can influence an organization, but that are out of their direct control.
A company does not generally influence any laws (although it is accepted that they could lobby or
be part of a trade organization). It is continuously changing, and the company needs to be flexible
to adapt. There may be aggressive competition and rivalry in a market. Globalization means that
there is always the threat of substitute products and new entrants. The wider environment is also
ever changing, and the marketer needs to compensate for changes in culture, politics, economics
and technology.
The macro marketing environment takes into account all factors that can influence an
organization, but are outside of their control. There are six major macro marketing environment
forces to deal with: political, economic, socio-cultural, technological, legal and environmental.
These six forces are defined briefly below:

• The political environment includes all laws, government agencies and lobbying groups that
influence or restrict individuals or organizations.

• The economic environment consists of all factors-such as general economic conditions,

salary patterns, and pricing patterns that affect consumer spending habits and purchasing
power.

• The legal environment also affects an organization – even though a company cannot
directly influence any laws – lobbying or becoming part of a trade organization is widely
accepted in helping to ‘shape’ particular legal decisions.

• The technological environment consists of those forces that affect the technology with
which can create new products, new markets and new marketing opportunities.

• The socio-cultural environment includes institutions and other forces that affect the basic
values, behaviors, and preferences of the society-all of which have an effect on consumer
marketing decisions. The Internal Environment
All factors that are internal to the organization are known as the ‘internal environment’. They are
generally audited by applying the ‘Five Ms’ which are Men, Money, Machinery, Materials and
Markets. The internal environment is as important for managing change as the external. As
marketers we call the process of managing internal change
Internal environment consists of strategic orientations and organization structures that capitalize
on the human, material and financial resources of the company. Internal environment consists of
5M’s:
• Market  Manpower
• Machine  Material and Money
23
Definitions of Marketing Environment: Marketing environment can be defined as:
In words of Philip Kotler “The marketing environment of the task environment and the broad
environment. The task environment includes the actors involved in purchasing, distributing and
promoting the offering. The broad environment consists of six components: demographic
environment, economic environment, natural environment, technological environment, political
legal environment, social-cultural environment”.
According to Cravens et., ”Marketing environment is that which is external to the marketing
management function, largely uncontrollable, potentially relevant to marketing decision-making
and changing and/or containing in nature.”
Kotler and Armstrong said, “A company’s marketing environment consists of the actors and
forces outside marketing that affect marketing management’s ability to build and maintain
successful relationships with target customers.”
Thus, marketing environment encompasses external environment i.e. dynamic powers, factors
which influence marketing effectiveness and ability, marketing activities, production of goods,
distribution goods and intermediaries on which company’s marketing department has no direct
control.

2.4 Elements of Marketing Environment

The elements of marketing environment can be classified in:

• Marketing Macro-environment – factors that affect the society as a whole and influence
the company indirectly.
• Marketing Micro-environment – the factors that influence directly the ability of the
company to achieve an offer standard desired by the customers
Macro Environment: Includes all factors that can influence an organization but that are out of
their direct control. It consists of larger societal forces that affect the companies’ micro
environment. It is continuously changing and the company needs to be flexible to adapt.

24
 Fig. 2.2 : Forces of Macro Environment
1) Demographic Environment: Business depends on people/consumer; it is obvious that
demographics is a major element to be studied in environment analysis. As a matter of fact several
factors relating to population such as size, growth rate, age distribution, and religious composition
and literacy levels need to be studied. Aspects such as composition of workforce household
patterns, regional characteristics, population shifts etc. also need to be studied, as they all are a
part of the demographic environment.
Demography means the study of human population in terms of size, growth rate, gender, age
distribution, race, occupation, literacy levels and other statistics. This study is very important to be
done by a marketer as his whole business depends on the people.

2) The Political Environment: Political environment is a major part of the macro-

environment for an industry/Business firm. In fact, economic environment is often a by-product of
the political environment, since economic and industrial policies followed by a nation greatly
depends on its political environment. Moreover, developments on the political front keep affecting
the economy all the time; industrial growth depends to a great extent on the political environment;
legislations regulating business are also often a product of the political configuration. Political
environment has several aspects.

3) The Socio-Cultural Environment: Culture, traditions, beliefs, values and lifestyles of the
people in a given society constitutes the socio-cultural environment. These elements decide to a
large extent, what the people will consume and how they will buy.
Culture: Culture is a combined result of factors like religion, language, education and
upbringing. In any society some cultural values are deep-rooted; they do not change easily
and are termed core cultural values. There are also values and practices, which constitutes
secondary cultural values, they are more amendable to change and can be molded and
manipulated relatively more easily. Meaningful information on the consumption habits,
life styles and buying behavior of the people can be obtained through a survey of the
socio-cultural environment. Cultural shifts carry with them marketing opportunities as well
as the threats. That is why close marketing of the cultural environment becomes important.
Social Class: Social class is one of the important concepts in socio-cultural environment.
Any society is composed of different social classes. A social class is determined by
income, occupation, location of residence etc. of its members. Each class has its own
standards with respect to lifestyles, behavior etc, they are known as the class value or class
norms. These values have a strong bearing on the consumption pattern and buying
behavior of the members of the class. Shifts in the class values do take place over time
owing to several factors. And, the study of socio-cultural aspects should include the study
of such shifts as well.

4) The Economic Environment: Economic environment is a vital component of macro-

environment. The factors to be considered under economic environment are given below:
- General economic conditions
- Economic conditions of different segments of the population; their disposable income,
purchasing power,etc.
-Rate of growth of the economy, rate of growth of each sector of the economy like as follows:
25
 • Agriculture
• Industry
• Consumer goods
• Capital goods
• Services
• Infrastructure
• Imports/Exports.
• Income, prices and consumption expenditure (size and pattern)
• Credit availability and interest rate
• Saving rate/Capital formation
• Inflation rate
• Behavior of capital markets
• Foreign exchange reserves
• Exchange rates
• Tax rates
• Prices of important materials
• Energy scene (cost, availability etc.)
• Labor scene (cost, skill availability etc)
5) The Natural Environment: The analysis of the macro-environment must also cover
aspects like extent of endowment of natural resources, in the country, ecology, climate etc. These
constitute the natural environment.
a) Natural resources: Business firms depend on natural resources. The extent to
which the country/ region under reference is endowed with these resources has an impact
on the functioning of the firms. Raw material is one major part of these resources, and the
firms are concerned with their availability; they need to know whether there will be a
shortage in any of the critical raw materials; they also need to know the trends governing
their costs. Besides raw materials, they are also concerned about energy, its availability as
well as cost. Escalations in energy cost are of particular concern to any business firm.
b) Ecology: Firms are also concerned with ecology. In modern times, all societies are
very much concerned about ecology, very especially about issues like environmental
pollution, protection of wildlife, and ocean wealth. And, governments are becoming active
bargainers in environment issues. Business firms have to know the nature and dimensions
of environment regulations and to what extent these factors will affect their business
prospects. They also need to know the role of environmental activities in the region.
c) Climate: Climate is another aspect of the natural environment that is of interest to
a business firm. Firms with products whose demand depends on climate, and firms
depending on climatedependent raw materials will be particularly concerned with this
factor. These firms have to study the climate in- depth and decide their production
locations and marketing territories appropriately.
6) The Technological Environment: Today, technology is a major force which industry and
business have to reckon with. Technology leads practically all the forces that shape people’s lives.
For a business firm, technology affects not only its final products but also its raw materials,

26
processes and operations as well as customer segments. And in the present times, rapid changes
are taking place in the realm of technology.
The IT industry is one example and Telecom is another.
Options Available in Technology: The firm has to analyze carefully to overall the
technology environment and the technology options available in the given industry. The
level of technology prevailing in the country is also concerned for the firm. It has to assess
the relative merits and cost effectiveness of alternative technologies. It has also to analyze
technology changes taking place in its industry at the international-level. In addition, it has
to assess the scope of substitute products emanating from new technologies.
Government’s Approach in respect to technology: Regulations by the government in
matters relating to technology often restrict the freedom of operation of business firms.
There may be areas where the governments support, the use of modern technology, there
may be areas where they may ban technologies that are potentially unsafe. All such factors
demand careful investigation.
Technology Selection: It is possible that several levels of technologies are floating at same
time in an industry. Firms have to scan the technology environment and select the
technology that will be appropriate for the term and the given product-market situation.
They have to forecast technological trends, assess the current and emerging technologies,
and develop the inputs for right technology choice. The policy of government on
technology import is also a concern in this regard. India is adopting a fairly liberal
approach to technology import. It also supports, at the same time, efforts at internal
technology development.
7) Legal Environment: Business has to operate within the framework of the prevailing legal
environment. They have to understand the implications of all the legal provisions relating to their
business. In recent times, the world over, legislation regulating business has been steadily
increasing. And it is particularly true for India. Business legislations can be classified into the
following broad categories based on the area covered by them
• Corporate affairs
• Consumer protection
• Employee protection
• Sectoral protection
• Corporate protection (protecting companies from each other, preventing unfair
competition)
• Protection of society as a whole against unbridled business behavior.
• Regulations on products, price and distribution.
• Control on trade practices.
Micro-environment
It consists of the actors close to the company that affect its ability to serve its consumers, the
company, suppliers, marketing intermediaries, competitors and publics.
1) The Company: The Company plays a very important role in the micro environment. This
could be deemed the internal environment.

27
 -Top management is responsible for setting the company’s mission, goals, objectives,
strategies and policies.
-Marketing managers must make decisions within the parameters established by the top
management. -Marketing managers must also work closely with other departments. Areas
such as finance, R&D, purchasing, manufacturing and accounting all produce better results
when aligned by common objectives and goals.

-All departments must “think consumer” if the firm is to be successful. The goal is to
provide superior customer value and satisfaction.
2) Suppliers: Suppliers form an important link in the company’s overall customer value
delivery system. They provide the resources needed by the company to produce its goods and
services. Suppliers’ problem can affect marketing. Marketing managers must watch supply
availability, supply shortages or delays, labor strikes and other events can cost sales in the short
run and damage customer satisfaction in the long run. Marketing managers also monitor the price
trends of their key inputs. Rising supply costs may force price increases that can harm the
company’s sales volume. Most marketers today treat their suppliers as partners in creating and
delivering customer value.
3) Marketing Intermediaries: Marketing Intermediaries are the firms that help the company
to promote, sell and distribute its goods to final buyers. They include resellers, physical
distribution firms, marketing services agencies, and financial intermediaries.

a) Resellers: These are distribution channel firms that help the company find customers or
make sales to them. These include retailers and wholesalers who buy and resell
merchandise. Resellers often perform important functions more cheaply than the company
can perform itself.

b) Physical Distribution firms: These firms help the company to stock and move goods from
their points of origin to their destinations. Example would be warehouses (that store and
protect goods before they move to the next destinations).

c) Marketing Services agencies: These are the marketing research firms, advertising
agencies, media firms and marketing consulting firms that help the company target and
promote its products to the right markets.

d) Financial Intermediaries: Financial intermediaries include banks, credit companies,

insurance companies, and other businesses that help financial transactions or insure against
the risks associated with the buying and selling of goods. Most firms and customers
depend on financial intermediaries to finance their transactions.
4) Competitors: Every company faces a wide range of competitors. The marketing concept
states that to be successful, a company must provide greater customer value and satisfaction than
its competitors do. A company must secure a strategic advantage over competitors by positioning
its offerings to be successful in the marketplace. No single competitive strategy is best for all
companies.
5) Customers: The company must study its customer markets closely since each market has
its own special characteristics. These markets normally include:

28
 -Consumer Markets: It consists of individuals and households that buy goods and services
for personal consumption.
-Business Markets: These markets buy goods and services for further processing or for
use in their production process.
-Government Markets: These markets are made up of government agencies that buy
goods and services to produce public services or transfer the goods and services to others
who need them.
-International Markets: These include all types of buyers in foreign countries.
6) Publics: A public is any group that has an actual or potential interest in or impact on an
organization’s ability to achieve its objectives. Generally publics can be identified as being:

a) Financial Publics: influences the company’s ability to obtain funds. Banks, investment
houses and stockholders are major financial publics.

b) Media Publics: These are the sources which carry news, features and editorial opinion.
They include newspapers, magazines radio and televisions.

c) Government Publics: Government developments are taken into account by the

management. The marketers must consult the company’s lawyers on issues of product
safety etc.

d) Citizen-action Publics: A company’s marketing decisions may be questioned by consumer

organizations, environmental groups, minority groups and others. The public relations
department can help it stay in touch with consumer and citizen-groups.

e) General Public: A company needs to be concerned about the general public’s attitude
towards its products and services. The public’s image of the company affects its buying.

2.5 Summary

The business enterprise is an open adaptive system with its own environment. It has interaction
and interdependence with social, political, legal, technological and cultural forces. These
environmental variables define the opportunities and threats available to and facing the enterprise.
The marketing environment comprises all the forces which influencing the company’s ability to
transact business effectively with its target market. The marking environment consists of macro-
environment and microenvironment. Macro environment consists of larger societal forces that
effect the entire micro environment. The six forces making up the macro environment include
economic, demographic, legal, technological, natural and cultural forces.
The company’s micro environment consists of forces that combine to form the company’s value
delivery network or that affect its ability to serve its customers. It includes the company’s internal
environment, its several departments and management levels, as it influences marketing decision
making.
Many companies view the marketing environment as an uncontrollable element to which they
must adapt. They passively accept the marketing environment and do not try to change it. They
analyze the forces and design strategies that will help the company avoid the threats and take
29
advantage of the opportunities the environment provides. Other companies rather than simply
watching and reacting, take aggressive actions to affect the public and forces in their marketing
environment.

2.6 Self Assessment Questions

1. Explain the need of environment scanning.

2 What do you mean by marketing environment?

3 Define the various elements of marketing environment.

4 Explain the difference between macro-environment and micro-environment.

5 What is the impact of marketing environment on the organizations?

6. Discuss the importance of political and legal environment study with examples.

7. Write a note on economic environment in India.

8 Define the five stages of environmental scanning. Why the environmental scanning is done
in an organization.

9 Environmental scanning is important for a firm in this competitive scenario. Explain.

10 Environment consists of macro and micro forces. Describe with the help of live examples.

2.7 Reference Books

 Armstrong/ Kotler (2007), “Marketing: An Introduction”(seventh edition)Published by

Dorling Kindersley (India) Pvt. Ltd, licenses of Pearson Education in South East Asia.

 Kotler, Philip. “Marketing Management”. Prentice Hall of India, New Delhi.

 Ramaswamy, V.S. and Namakumari, S. “Marketing Management, Planning and Control”.
Macmillan India Ltd., New Delhi.

 Dr.Kapil Sharma(2009), “Marketing Management” Global India Publications Pvt. Ltd, New
Delhi.

- Philip Kotler, Kevin Lane, Abraham Koshy, Mithileshwer Jha, “Marketing, A south Asian
Perspective”, Pearson Education, 2009.

30
 Unit - 3 : Marketing Mix

Structure of Unit:

3.0 Objectives
3.1 Introduction
3.2 Definition and Elements of Marketing Mix
3.3 Extended Marketing Mix
3.4 Sub-Marketing Mix
3.5 Factors Affecting Marketing Mix
3.6 Formulating Marketing Mix
3.7 Limitations of Marketing Mix
3.8 Summary
3.9 Self Assessment Questions
3.10 Reference Books

3.0 Objectives

After completing this unit, you will be able to:

• Define the concept of marketing mix and its components.

• Know the various factors related to the marketing mix, formulation of marketing mix and
its limitations.

3.1 Introduction

Marketing is the creative management function which promotes trade and employment by
assessing consumer needs and initiating research and development to meet them. It coordinates the
resources of production and distribution of goods and services, and determines and directs the
nature and scale of total efforts required to maximize sales. Marketing mix is one of the emerging
concepts which consists of all the major components like product, price, place, and promotion.
The term “marketing mix” was coined in 1953 by Neil Borden in his American Marketing
Association
Presidential Address. However, this was actually a reformulation of an earlier idea by his
associate, James Culliton, who in 1948 described the role of the marketing manager as a “mixer of
ingredients”, who sometimes follows recipes prepared by others, sometimes prepares his own
recipe as he goes along, sometimes adapts a recipe from immediately available ingredients, and at
other times invents new ingredients no one else has tried. A prominent marketer, E. Jerome
McCarthy, proposed a Four P classification in 1960, which has seen wide use in marketing theory
and practice.

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The term “marketing mix” became popularized after Neil H. Borden published his 1964 article,
The Concept of the Marketing Mix”. The ingredients in Borden’s marketing mix included product
planning, pricing, branding, distribution channels, personal selling, advertising, promotions,
packaging, display, servicing, physical handling, and fact finding and analysis. E. Jerome
McCarthy later grouped these ingredients into the four categories that today are known as the 4 P’s
of marketing.
Marketing mix is the policy adopted by the manufacturer to get success in the field of marketing.
Marketers use different tools in order to get the desired response from the customer or best satisfy
their needs. These tools are known as The Marketing Mix. Marketing Mix is probably the most
famous term in marketing.

3.2 Definition and Elements of Marketing Mix

According to Borden, the marketing mix refers to the efforts, the combination, the designing and
the integration of the elements of marketing into a programme or mix which, on the basis of an
appraisal of the market forces, will best achieve an enterprise at a given time.
According to William J. Stanton, marketing mix is the term used to describe the combination of
the four inputs which constitute the core of a company’s marketing system – the product, the price
structure, the promotional activities and the distribution system.
ELEMENTS OF MARKETING MIX
Marketing Mix is a combination of marketing tools that a company uses to satisfy their target
customers and achieving organizational goals. McCarthy classified all these marketing tools
under four broad categories:
• Product
• Price
• Place
• Promotion
These four elements are the basic components of a marketing plan and are collectively called 4
P’s of marketing. 4 P’s pertain more to physical products than services. The important thing to
note is that all these four P’s (variable) are controllable, subject to internal and external
constraints of marketing environment. Marketers, using different blends of these variables, can
target different group of customers having different needs. So, a customer may call marketing
mix “the offering”.
1. Product - It is a tangible object or an intangible service that is mass produced or
manufactured on a large scale with a specific volume of units. Intangible products are service
based like the tourism industry and the hotel industry or codes-based products like cell phone load
and credits. Typical examples of a mass produced tangible object are the motor car and the
disposable razor. A less obvious but ubiquitous mass produced service is a computer operating
system. Packaging also needs to be taken into consideration. Every product is subject to a life-
cycle including a growth phase followed by an eventual period of decline as the product
approaches market saturation. To retain its competitiveness in the market, product differentiation
is required and is one of the strategies to differentiate a product from its competitors.

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Product is the actually offering by the company to its targeted customers which also includes
value added stuff. Product may be tangible (goods) or intangible (services). While formulating the
marketing strategy, product decisions include:
• What to offer?
• Brand name
• Packaging
• Quality
• Appearance
• Functionality
• Accessories
• Installation
• After sale services
• Warranty
2. Price – The price is the amount a customer pays for the product. The business may
increase or decrease the price of product if other stores have the same product. Price includes the
pricing strategy of the company for its products. How much customer should pay for a product?
Pricing strategy not only related to the profit margins but also helps in finding target customers.
Pricing decision also influence the choice of marketing channels. Price decisions include:

• Pricing Strategy (Penetration, Skim, etc)

• List Price
• Payment period
• Discounts
• Financing
• Credit terms
Using price as a weapon for rivals is as old as mankind, but it’s risky too. Consumers are often
sensitive for price, discounts and additional offers. Another aspect of pricing is that expensive
products are considered of good quality.
3. Place – Place is another important element of marketing mix. Once the goods are
manufactured, packaged, priced and promoted, they must be made available to the consumers.
Activities related to placing the products are covered under this element of marketing-mix.
(A) Channels of distribution
(B) Physical distribution

Order Processing: Physical distribution begins with customers’ order. Both the company
and customer are benefited if order processing is carried out quickly and accurately. These
days computers are used which establish a link between retailers and producers. Producers
keep a watch on the stock position at retailers’ place retailers may also place orders
through computer.
Warehousing: Every company must store goods to maintain a proper flow. Storage
facilities are important because production and consumption cycles generally do not
match. Companies need to decide the number, space and location of warehouses. The cost
of these should be in balance with customer service. Companies may own warehouses or
take them on rent.
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 Inventory: Inventory level also affects customer satisfaction. Marketers would like that
company having enough stock to fulfill all customers’ order immediately. But it involves
heavy cost. Companies should, therefore, carefully plan when to order and how much to
order.
Transportation: Transportation has infect, facilitated the physical distribution of goods
and services over a larger area. Modes of transportation may include road, rail, water, air,
etc. The choice of mode of transport affects the pricing and condition of goods. Hence this
is an important decision and requires lot of thinking.

Place represents the location where a product can be purchased. It is often referred to as the
distribution channel. It can include any physical store as well as virtual stores on the Internet. It
not only includes the place where the product is placed, but also all those activities performed
by the company to ensure the availability of the product tot he targeted customers. Availability of
the product at the right place, at the right time and in the right quantity is crucial in placement
decisions.
Placement decisions include:
• Placement
• Distribution channels
• Logistics
• Inventory
• Order processing
• Market coverage
• Selection of channel members
4. Promotion- Promotion represents all of the communications that a marketer may use in the
marketplace. Promotion has four distinct elements: advertising, public relations, personal selling
and sales promotion. A certain amount of crossover occurs when promotion uses the four principal
elements together, which is common in film promotion. Advertising covers any communication
that is paid for, from cinema commercials, radio and Internet adverts through print media and
billboards.
Public relations are where the communication is not directly paid for and includes press releases,
sponsorship deals, exhibitions, conferences, seminars or trade fairs and events. Word of mouth is
any apparently informal communication about the product by ordinary individuals, satisfied
customers or people specifically engaged to create word of mouth momentum. Sales staff often
plays an important role in word of mouth and Public Relations. Direct marketing and tele
marketing are the new methods of Promotion.
Promotion includes all communication and selling activities to persuade future prospects to buy
the product.
Promotion decisions include:
• Advertising
• Media Types
• Message
• Budgets
• Sales promotion
• Personal selling
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 • Public relations
• Direct marketing
As these costs are huge as compared to product price, So it’s good to perform a break-even
analysis before allocating the budget. It helps in determining whether the new customers are worth
of promotion cost or not.
Any organization, before introducing its products or services into the market conducts a market
survey. The sequence of all ‘P’s as above is very much important in every stage of product life
cycle Introduction, Growth, Maturity and Decline.

3.3 Extended Marketing Mix

More recently, three more Ps have been added to the marketing mix namely People, Process and
Physical Evidence. This marketing mix is known as Extended Marketing Mix. In the service
sector, these three p’s, in addition to the four P’s, are very relevant and vital.
People: All people involved with consumption of a service are important. For example workers,
management, consumers etc. It also defines the market segmentation, mainly demographic
segmentation. It addresses particular class of people for whom the product or service is made
available.
Process: Procedure, mechanism and flow of activities by which services are used.
Physical Evidence: The marketing strategy should include effectively communicating their
satisfaction to potential customers.
It often takes time and requires market research to develop a successful marketing mix. You
should not depend on one mix always try new mixes. While designing the mix, make changes to
all mixes in such a way that all conveys the same message. Don’t confuse your customers by just
changing one variable and keeping the rest same.

3.4 Sub Marketing Mix

SUB COMPONENTS OF 4 P’S

Components of marketing mix further divided into various parts as sub components as follows;
4P’S PRODUCT PRICE PLACE PROMOTION
Sub Features Credit terms Channels Advertising
components Design Payment periods Location Sales
promotion
Brand Discount Delivery Personal selling
Packages Commission Transport Publicity
Warranty Price variations Whole selling

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3.5 Factors Affecting Marketing Mix

The marketing mix will have to be changed at the change of marketing conditions like
economical, political, social etc. The following are the major factors affecting the marketing mix
which are grouped into micro and macro factors.

Marketing mix

Micro factors Macro factors

Figure 3.1
1. Macro-Environment
The term macro-environment denotes all forces and agencies external to the marketing firm itself.
Some of these forces and agencies will be closer to the operation of the firm than others, e.g. a
firm’s suppliers, agents, distributors and other distributive intermediaries and competing firms.
These ‘closer’ external constituents are often collectively referred to as the firm’s proximate
macro-environment to distinguish them from the wider external forces found, for example, in the
legal, cultural, economic and technological sub-environments.
This consists of people, organizations and forces within the firm’s immediate external
environment. Of particular importance to marketing firms are the sub-environments of suppliers,
competitors and distributors
(intermediaries). The main factors making up these wider macro-environmental forces fall into
four groups.
1. Political and legal factors
2. Economic factors
3. Social and cultural factors
4. Technological factors
The Political and Legal Environment: To many companies, domestic political considerations
are likely to be of prime concern. However, firms involved in international operations are faced
with the additional dimension of international political developments. Many firms export and may
have joint ventures or subsidiary companies abroad. In many countries, particularly those in the
so-called ‘Third World’ or more latterly termed ‘Developing Nations’, the domestic political and
economic situation is usually less stable than in the UK. Marketing firms operating in such volatile
conditions clearly have to monitor the local political situation very carefully.
Many of the legal, economic and social developments, in our own society and in others, are the
direct result of political decisions put into practice, for example the privatization of state industries
or the control of inflation.

36
The Economic Environment: Economic factors are of concern to marketing firms because they
are likely to influence, among other things, demand, costs, prices and profits. These economic
factors are largely outside the control of the individual firm, but their effects on individual
enterprises can be profound. Political and economic forces are often strongly related. Economic
changes pose a set of opportunities and threats, and by understanding and carefully monitoring the
economic environment, firms should be in a position to guard against potential threats and to
capitalize on opportunities.
The Socio-Cultural Environment: This is perhaps the most difficult element of the macro-
environment to evaluate, manifesting itself in changing tastes, purchasing behaviour and changing
priorities. The type of goods and services demanded by consumers is a function of their social
conditioning and their consequent attitudes and beliefs.
The Technological Environment: Technology is a major macro-environmental variable which
has influenced the development of many of the products we take for granted today, for example,
television, calculators, video recorders and desk-top computers. Marketing firms themselves play
a part in technological progress, many having their own research department or sponsoring
research through universities and other institutions, thus playing a part in innovating new
developments and new applications.
Other Macro-Environmental Factors: The macro-environmental factors discussed are not
intended to be an exhaustive list, but merely to demonstrate the main areas of environmental
change. Other subenvironments may be important to marketing management, for example, in
some countries the religious environment may pose an important source of opportunities and
threats for firms. Demographic Changes (for example, increase in population of 60f, increase in
average life expectancy, change in sex ratio etc.) demographic changes are considered important
by companies in present times.
2. The Micro-Environment:
The term micro-environment denotes those elements over which the marketing firm has control or
which it can use in order to gain information that will better help it in its marketing operations. In
other words, these are elements that can be manipulated, or used to glean information, in order to
provide fuller satisfaction to the company’s customers. The objective of marketing philosophy is
to make profits through satisfying customers. This is accomplished through the manipulation of
the variables over which a company has control in such a way as to optimise this objective. The
variables are what Neil Borden has termed ‘the marketing mix’ which is a combination of all the
‘ingredients’ in a ‘recipe’ that is designed to prove most attractive to customers.
In this case the ingredients are individual elements that marketing can manipulate into the most
appropriate mix. E Jerome McCarthy further dubbed the variables that the company can control in
order to reach its target market the ‘four Ps’. Each of these is discussed in detail in later chapters,
but a brief discussion now follows upon each of these elements of the marketing mix together with
an explanation of how they fit into the overall notion of marketing.
1. Nature of Product: Different types of products require different promotion mix. In case of
consumer goods, advertisement is considered to be the most important because the goods are non-
technical and produced on a large scale. But for industrial goods personal selling is regarded as the
most important tool because the products are technical in nature, costly and persuasion is
considered essential for their sale.

37
2. Type of the Market: If the number of customers is quite large and they are spread over a
vast area, advertisement is more helpful because it can reach people everywhere. However if
number of customers is not very large and they are concentrated geographically, personal selling
and sales promotion may be more effective.
3. Stage of the Product Life Cycle: The promotional mix depends upon the stage of the
product in product life cycle. During introduction, heavy expenditure is incurred on advertisement
followed by personal selling and sales promotion. During the growth stage, customers are aware
of the benefits of product. Hence advertisement along with personal selling will be more effective.
At the maturity stage, competition is more intense. Sales promotion becomes the most important
tool to boost sales.
4. Budget: Funds available for promotion also decide promotion mix, e.g. advertisement is a
costly tool. If sufficient funds are not available this tool may not be adopted. Personal selling
involves continuous spending. Thus, budget is a deciding factor for promotion-mix.
5. Push vs. Pull Strategy: When the firm pushes the product to the middlemen they in turn
push it to the consumers, it is known as ‘push’ strategy. In this case, personal selling or display
should be more effective. Pull strategy refers to the policy of a company to strive to build up
consumer demand without recourse to middlemen. Generally advertising is considered more
important in case of pull strategy.

3.6 Formulating Marketing Mix

A firm’s marketing efforts should starts and end with the customers. The marketing mix is the
important tools used by the marketing manager in formulating marketing planning to suit the
consumers need. There is a need of well defined marketing mix to attain the goal of the marketing
department of the firm. Hence formulation of marketing mix is also one of the emerging functions
of the marketing management. The steps involved in the marketing mix process are as follows;
Environmental Scanning
Study of marketing environment analysis helps to locate marketing opportunities and discover
unsatisfied consumer demand. It also undertakes consumer sensing, reactions of the consumer to
its products and tries to locate the causes of the consumers patronage of a particular rand and who
remain closest to the consumer, and why.
Internal Scanning
Internal scanning is the process of assessing the firm’s strength and weakness and identifying its
core competencies and competitive advantages .while environmental scanning may help to
identify the various possible opportunities in areas of interest to the firm.
Setting the Objectives
Objectives are the main focus of the business unit which explores the functions and performance.
Hence , there is a well defined objectives should be established The business unit has to develop
its marketing objectives after weighing the opportunities available in the environment, the treats,
the forces of competitions, the resources and capabilities of the unit and its marketing
organisations.

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Formulating the Strategy
Marketing strategy should e aligned with corporate and business level strategies .marketing
strategy formulation is the core of marketing mix. Marketing programme of an individual product
must be consistent with the strategic direction, competitive trust and resources allocation decided
on at a higher management level.
Developing the Functional Plans
The detailed functional plans will spring from and be in true with the marketing objectives and
marketing strategy of the firm. There is a need of well defined functional plans leads to systematic
and structured flow of the functions in the business concern. There is a separate plans for each
components of marketing mix viz product, price , place and promotion. And at the same time, each
components must have a predetermined with organized efforts.

3.7 Limitations of Marketing Mix

Marketing mix (4 P’s) was more useful in early 1920’s when production concept was in and
physical products were in larger proportion. Today, with latest marketing concepts, marketing
environment has become more integrated. So, in order to extend the usefulness of marketing mix,
some authors introduced a fifth P and then seven P’s (People, Packaging, and Process). But the
foundation of Marketing Mix still stands on the basic 4P’s.
These four P’s are the parameters that the marketing manager can control, subject to the internal
and external constraints of the marketing environment. The goal is to make decisions that center
the four P’s on the customers in the target market in order to create perceived value and generate a
positive response.

3.8 Summary

Once the market has been segmented, target markets selected, and positioning strategies have been
determined, then the firm needs to develop the marketing mix for their offering. The traditional
marketing mix, also known as the 4P’s of marketing comprises four key elements:
- Product;
- Price;
- Promotion; and
- Place (or distribution).
A number of strategic decisions need to be made with respect to each element. The four elements
of the marketing mix should be carefully integrated (blended together) to develop an offering that
closely matches the needs and wants of the target market and reflects the desired product
positioning. To reflect service products and the service elements of physical goods, the traditional
marketing mix has now been extended to 7P’s and also includes:
- People;
- Processes; and
- Physical evidence.

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3.9 Self Assessment Questions
1. Define marketing mix

2. Explain the components of marketing mix

3. State the extended marketing mix
4. Discuss the various factors affecting marketing mix
5. Evaluate the process of formulating the marketing mix

6. Mention the limitations of marketing mix

3.10 Reference Books

- David W.Cravens, Cerald E.Hills, Robert B.Woodruff,2002. Marketing Management,
AITBS Publishers and Distributors.

- Michael R. Czinkota, Masaaki Kotabe, 2000. Marketing Management, Vikas Publishing

House, Thomson South Western, New Delhi.

- Philp Kotler, 2002. Marketing Management, Prentice Hall of India Pvt. Ltd., New Delhi.

- Pillai. R.S.N. and Bagavathi, 2005, Modern Marketing, S.Chand & Company, New Delhi

- Rustom S.Davar, Sohrab R.Davar, Nusli R.Davar,1999, Modern Marketing Management,

Universal book stall.

- Varshney, R.L and Gupta, S.P, 2000. Marketing Management- An Indian Perspective,
Sultan Chand and Sons, New Delhi.

Unit - 4 : Marketing Research

Structure of Unit:

4.0 Objectives
4.1 Introduction
4.2 Definition
4.3 Market Research vs. Marketing Research
4.4 History of Marketing Research
4.5 Components of Marketing Research
4.6 Objectives of Marketing Research
4.7 Features and Importance of Marketing Research
4.8 Marketing Research Process
4.9 Limitations of Marketing Research
4.10 Summary
4.11 Self Assessment Questions
4.12 Reference Books

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4.0 Objectives

After completing this unit, you will be able to:

• Understand the concept of marketing research and its importance.

• Know the various processes which involves in the field of marketing research.

4.1 Introduction

Marketing is the process of discovering and translating consumer needs and wants into product
and service specifications, creating demand for these products and services and then in turn
expanding this demand. Marketing research is concerned with getting the best possible answer to
certain major questions of business , namely , what to produce or handle, when and how much to
produce, where to place the product over the market, where to direct sales effort , and what price
to change .
Marketing research can be defined as the process of gathering recording and analyzing the data
related to certain products and services. This need for market research is derived from the concept
that only by understanding the needs and wants of the target audience and by effectively meeting
them, you will be able to achieve the organizational goals and surpass the competition in the
specific market.
There are two methods of marketing research, namely primary research or secondary market
research. While primary research seeks to understand customer motivations, opinions and needs
through quantitative and qualitative field research. In contrast to that, secondary market research
uses already existing sources of information to gather the data.

4.2 Definition

American Marketing Association defines ,”Marketing research is the function that links the
consumer, customer, and public to the marketer through information - information used to identify
and define marketing opportunities and problems; generate, refine, and evaluate marketing
actions; monitor marketing performance; and improve understanding of marketing as a process.
Marketing research specifies the information required to address these issues, designs the methods
for collecting information, manages and implements the data collection process, analyzes, and
communicates the findings and their implications.”
Marketing research is a systematic objectives and exhaustive search for and study of the facts
relevant to any problem in the field of marketing. Marketing research is a part of marketing
information system, and a key to the implementation of the marketing concept. It is usually
designed to aid planning and often involves evaluation of previous marketing efforts.

4.3 Market Research vs. Marketing Research

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Market research is about understanding the broader marketplace in which we intend to compete.
Marketing research, on the other hand, is about understanding what ‘package’ of marketing
elements (i.e. the product, price, promotion and distribution factors) the country will need to put
together in order to meet customer needs and to succeed in the marketplace.
Market research is the more encompassing/broader concept of understanding the market
environment in which you will be competing, while marketing research is the more
specific/focused view of consumer needs and behaviour.

4.4 History of Marketing Research

The idea of marketing research was developed in the late 1920’s by a man named Daniel Starch.
This is about the same time that advertising was introduced in the United States. At that time,
copywriters would write what they thought an ad should be, publish the ad, and then hope that
readers would act upon the information provided During the early 1930’s Daniel Starch developed
the theory that effective advertising must be seen, read, believed, remembered, and then acted
upon. Soon after, he developed a research company that would interview people in the streets,
asking them if they read certain publications. If they did, his researchers would show them the
magazines and ask if they recognized or remembered any of the ads found in them. After
collecting the data, he then compared the number of people he interviewed with the circulation of
the magazine to figure out how effective those ads were in reaching their readers. Thus surveying
or marketing research was born.
As time went on, many marketing research companies began to emerge and began following
Starch’s example and worked to improve his techniques. A man by the name of George Gallup
developed a rival system that was known as the “aided recall” which prompted people interviewed
to recall the ads seen in a publication, without actually showing them the ads. This rival system
was later used to measure the effectiveness of radio and television advertising. In the late 1980’s a
man named Ronald Lindorf founded what would be the largest marketing research companies in
the United States, Western Wats. The focus of Western Wats was to leverage the current
technology of W.A.T.S. telephone lines to conduct survey research. There was no longer a need to
interview people on the streets or to organize and conduct focus groups. A representative in a call
center could collect all of the data desired. This greatly increased the number of surveys collected
each year and again, improved the marketing research model ten fold.
Over the last 5 to 10 years marketing research has taken another great leap in terms of how it is
collected. Yes, it is still collected via survey research; however, it is mostly collected via surveys
over an internet connection. Western Wats (recently renamed as Opinionology) is still the largest
marketing research company in the US and collects the majority of their research via their online
panel called Opinion Outpost. Instead of cold calling an individual to collect the data, anyone
interested in participating in these studies can sign up to receive surveys and freely share their
opinion. It is much less intrusive and the quality of data is often times much higher since people
can participate on their own schedule, instead of being rushed when they receive a phone call from
a call center.

4.5 Components of Marketing Research

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The mission of marketing research is to provide management with relevant, accurate, reliable,
valid, and current information. Competitive marketing environment and the ever-increasing costs
attributed to poor decision making require that marketing research provide sound information.
Sound decisions are not based on gut feeling, intuition, or even pure judgment. The following are
the major components of marketing research.
1. Market Research
Market research is any organized effort to gather information about markets or customers. It is a
very important component of business strategy. The term is commonly interchanged with
marketing research; however, expert practitioners may wish to draw a distinction, in that
marketing research is concerned specifically about marketing processes, while market research is
concerned specifically with markets.
Market Research is the key factor to get advantage over competitors. Market research provides
important information to identify and analyze the market need, market size and competition.
2. Product Research
This looks at what products can be produced with available technology, and what new product
innovations near-future technology can develop (see new product development). Developing and
designing great products are keys to success in business. Anything less than an excellent product
strategy can be destructive to a firm. Top companies’ focus on few products and concentrate on
maintaining a high level of quality for those products to maximize the potential for success.
However, most products have a limited and even predictable life cycle and companies must be
constantly looking for new products to design, develop and take to market. Good operations
managers insist upon strong communication between customer, product, processes, and suppliers
that results in a high success rate for their new products. One product strategy is to build particular
competence in customizing goods or services. This approach allows the customer to choose
product variations while reinforcing the organization’s strength. Dell Computers, for example, has
built a huge market by delivering computers with the exact hardware and software desires by the
end user. And Dell does it fast - it understands that speed to market is imperative to gain a
competitive edge.
Marketers see product research as the first stage in Product Life Cycle Management. Product
research is a business and engineering term which describes the complete process of bringing a
new product to market. There are two parallel aspects to this process;
3. Advertising Research
Advertising research is a specialized form of marketing research conducted to improve the
efficiency of advertising. According to MarketConscious.com, “It may focus on a specific ad or
campaign, or may be directed at a more general understanding of how advertising works or how
consumers use the information in advertising. It can entail a variety of research approaches,
including psychological, sociological, economic, and other perspectives.”
It is a specialized form of marketing research conducted to improve the efficacy of advertising.
Copy testing, also known as “pre-testing,” is a form of customized research that predicts in-market
performance of an ad before it airs, by analyzing audience levels of attention, brand linkage,
motivation, entertainment, and communication, as well as breaking down the ad’s flow of
attention and flow of emotion. Pre-testing is also used on ads still in rough form.
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4. Motivation Research
Research used to investigate the psychological reasons why individuals buy specific types of
merchandise, or why they respond to specific advertising appeals, to determine the base of brand
choices and product preferences.
Motivation research is a Qualitative research designed to probe the consumer’s subconscious and
discover deeply rooted motives for purchasing a product.
Motives - Something that compels or derives a consumer to take a particular action. Motivation
research is also used to investigate the psychological reasons why individuals buy specific types of
merchandise, or why they respond to specific advertising appeals, to determine the base of brand
choices and product preferences
5. Sales Research
Sales research is geared towards discover certain data which is required to make additional sales
to a company’s existing customers. A Sales Research Specialist is someone who has the expertise
to find, evaluate, analyze, organize and package suspect, prospect and customer data into useful
intelligence a sales force can act on — immediately. Sales research enables salespeople to do what
they do best, which is selling, instead of spending their time trying to find who is looking to buy.
The process of sales research can also have other benefits over and above generating sales - such
as reducing costs. For example, the identification of contact name and address changes reduces a
company’s sales and marketing communications costs — by eliminating phone calls and mailings
to contacts who are no longer employed or who have changed positions.

4.6 Objectives of Marketing Research

Marketing research attempts to provide accurate information that reflects a true state of affairs. It
should be conducted impartially. While research is always influenced by the researcher’s research
philosophy, it should be free from the personal or political biases of the researcher or the
management. The following are the major objectives of marketing research;
• To recognize the sales volume and their opportunities
• To understand the competitive position of rival products
• To evaluate the reactions of customers ad consumers
• To learn the price trends
• To measure the system of distribution
• To know the merits and limitations of the product
• To find new methods of packaging
• To analyze the market size
• To determine the level of demand
• To evaluate the profitability
• To study the customer acceptance of product
• To assess the volume of future sales
• To study the nature of market and its locations
• To find the solutions to marketing related problems
• To use the modern technology in the field of marketing

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 • To coordinate the marketing activities

4.7 Features and Importance of Marketing Research

The main features of marketing research are noted below:

1. Systematic and Continuous Process

Marketing research is a continuous process. One type of research is not adequate to resolve all
marketing problem. Similarly, new research projects will have to be undertaken to solve new
marketing problem and challenges.

A marketing company faces new marketing problem from time to time and for facing them
marketing research activities need to be conducted on regular basis. A marketing company has to
conduct marketing research regularly for its survival and growth in the present dynamic marketing
environment.

2. Wide in Scope Application

Marketing research is wide in scope as it deals with all aspects of marketing of goods and
services. Introduction of new products, identification of potential markets, selection of appropriate
selling techniques, study of market competition, introduction of suitable advertising strategy and
sales promotion measures are some areas covered by Marketing research

3. Emphasizes on Accurate Data Collection and Critical Analysis

In marketing research, required data should be collected objectively and accurately. The data
collected must be reliable. It should be analyzed in a systematic manner. This will provide
comprehensive picture of the situation and possible solution.

4. Offers Benefits to Sponsoring Company and Consumer

Marketing research is useful to the sponsoring company. It raises the turnover and profit of the
company. It also raises the competitive capacity and creates goodwill in the market. It enables a
company to introduce consumer- oriented marketing policies. Consumer also gets agreeable goods
and more satisfaction due to marketing research activities.

5. Commercial Equivalent of Military Intelligence

Marketing research is the commercial intelligence activity. It is similar to military intelligence where
systematic study is made before taking any military action marketing research acts as the intelligence
tool of marketing management.

6. Device for Managerial Decisions

Marketing research acts as a tool in the hands of management for identifying and analyzing
marketing problem and finding out solution to them. It is and aid to decision-making. It suggests
possible solution for the consideration and selection by managers. Marketing research is an aid to
Judgement and never a substitute for it.

45
7. Applied Type of Research
Marketing research is an applied knowledge. It is also called ‘decisional’ research as it provides
specific alternative solution to deal with a specific marketing problem. It studies specific
marketing problem and suggests alternative solution and possible.
8. Reduces the Gap between the Producers and Consumer
Marketing research is an essential supplement of modern competitive marketing. It is useful for
understanding the needs and expectations of consumers. It reduces the gap between producers and
consumers and adjusts the marketing activities to suit the needs of consumer.
9. Not an Accurate Science
Marketing research is both science and an art. It collects information and studies marketing
problem in a scientific manner. The information collected is also applied to real life problem.
However, marketing research is not an exact science. It only suggests possible solution and not the
exact solution to marketing manager for consideration and selection. At present, Marketing
research is treated as a professional activity. We have professional research agencies dealing with
the marketing problem of their clients on commission basis.
10. Apply of Different Methods
Marketing research can be conducted by using different methods. Data can be collected through
survey or by other methods like observation method or experimentation method. Even computers
and internet are used for data collection. The researcher has to decide the method suitable for his
research project.
11. Dynamic Character
Marketing research is dynamic in nature. Its scope is fast expanding along with the new
developments in the field of marketing. In addition, development in other subjects such as
economics, statistics, computer science, sociology, psychology, cultural anthropology and
behavioural sciences also bring corresponding changes in the field of marketing research. This
suggests that marketing research is a dynamic and progressive subject.
12. Closely Linked with Marketing Information System (MIS)
Both the concepts are interrelated. In fact, marketing research is one component of MIS. Both are
useful for solving marketing problem and for accurate and quick decision-making in the field of
marketing.
IMPORTANCE OF MARKETING RESEARCH
The importance of marketing research in management extends to intelligent decision making,
maximizing profits, increasing the sales, minimizing the risks and ascertaining whether a new
product will be profitable in a given market at a given time. Read on to know more about the
importance of marketing research.
Toying with a new product idea, wanting to boost up your sales or planning to launch a new
product, the importance of marketing research has grown unprecedented, especially in the times of
recession. In fact, Philip Kotler, the marketing guru, acknowledges that it is only by marketing
research, planning, implementation and control that effective marketing management can be
accomplished. Before we can highlight the benefits and importance of marketing research in
management, let us effectively look at the concept.
46
1. Marketing Decisions
Marketing research helps the marketers to make a decision about the product or service.
Sometimes a marketer might believe that the new product or service is useful for the customers.
However, research may show that customers do not need a product or are meeting their needs with
a certain competitor product and so on. Similarly good marketing research strives to provide
options for the successful introduction of new products and services. This makes the market entry
of a new product or service less risky.
2. Survive the Competition
Marketing research helps in ascertaining and understanding competitor information such as their
identity, marketing network, customer focus and scale of operations. This helps in surviving and in
certain cases, even leaving behind the competition. Moreover, with market research you can also
help understand the under-served consumer segments and consumer needs that have not been met.
3. Decide Target Markets
Research helps provide customer information in terms of their location, age, buying behavior and
gender.
This helps the marketers zero in on the target markets and customers for their products and
services.
4. Maximize Profits
Apart from profit maximizing steps such as item optimization, customer profitability analysis, and
price elasticity, marketing research allows you to find out methods that can help you maximize
profits. For example, a product’s price elasticity research can help you ascertain the impact of an
increased price on the sales and the profits of a product. This emphasis on profitability also helps
the company’s focus to shift from maximizing sales to increasing the profits of a company. This
helps the company survive in the long run and maximize its profits.
5. Increasing the Sales
Increasing the sales of your products or services helps a company in maximizing its profits. By
understanding the customer’s needs, wants and attitude towards the products and determining
whether your products fit the bill, marketers can increase their sales. This helps in not only
increasing the sales to the target customers and people already using the product but also
converting the non users into customers for the product.
The following are the other aspects of the importance of marketing research.
• Determine the best types of marketing strategies to implement.
• Obtain a good understanding of current economic conditions which may be affecting the
market, so you can determine the best ways to market in the midst of those conditions.
• Provide crucial data which enables you to best predict how consumers will respond to
various marketing strategies and programs.
• Uncover opportunities within the market.
• Discover and define current marketing issues and problems.
• Understand which elements (e.g., laws, economy, policies, and environment) are within
your control and which are not, and make sound decisions accordingly.
• Discover or create alternatives as needed based on the information collected.

47
 • Constantly evaluate and improve the marketing decision process.

4.8 Marketing Research Process

Marketing Research is the function that links the consumer, customer, and public to the marketer
through information — information used to identify and define marketing opportunities and
problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and
improve understanding of marketing as a process. Marketing research specifies the information
required to address these issues, designs the method for collecting information, manages and
implements the data collection process, analyzes the results, and communicates the findings and
their implications

Marketing Research
RESEARCH Process
PROCESS

Formulating research problem

Extensivereview of literature
Exp

Developing the hypothesis

Preparing the research design

Determining the sample design

Collecting the data

Analysis of the data

Testing of hypothesis

Writing interpretation

Preparation of research report

Follow up

Figure 4.1 : Marketing Research Process

1. Formulating the Research Problem: Any research should start with a problem. Research
problem is the basic and initial stage of the research process which is going to be analyzed and
given solution. Hence, formulating the research problem plays a key role in deciding the
48
significance and needs of the research. The researches may find out the research problem with the
help of his own interest, subject knowledge or discussion with experts and field of specialization.
Research problem is nothing but a topic. For example: “A study on Consumer Awareness towards
the consumer protection Act, 1986 in Salem district”.
2. Extensive Literature Survey: Review of literatures helps to acquire in depth knowledge
in the particular topic. It is the study of related concept and how it will be related or deviated from
the present research problem. The researchers may refer various published and unpublished
sources to collect the review of literature. Literature survey also helps to meet the research gap
which is the ultimate aim of the research particularly to differentiate the current problem in to
previous problem. Review of literature provides detailed knowledge on previous studies carried
out in that subject. The literature over a subject matter of research can be had from the available
standard books, periodicals, journals, published and unpublished research works, conference
proceedings, and Government reports etc. There is methodology for writing the review of
literature. It is called as scholarly writing of the report.
3. Developing the Hypothesis: Hypothesis is a statement or assumption which is proved or
disproved with the help to analyze selecting and developing hypothesis becomes an important part
in the research. Hypothesis may be developed with the help of the experts, in depth knowledge
and trends of the research. A good hypothesis will provide a better result and it will reflect the
entire research. Formulating the hypothesis alone an important task of the research which helps to
understand the relationship between the variables and also it provides the scientific proof of the
result.
4. Preparing the Research Design: Research design is the blue print of the research which
consists of requirement of cost, time, manpower and other resource to complete the research in a
prescribed period. It is an art of drafting the research activities in a systematic manner with the
help of available resources. A good research design leads to avoid unnecessary delay and
drawbacks. Once the researcher drafted the research design, half of the research process has
completed. The researcher should think about the requirements of the resources like man material,
money and time.
5. Determining the Sample Design: Sample is considered as the source of data collection
while using the primary data. Sample means a population where the data is going to be collated
for the research study. Selection of the sampling depends upon the nature of the study and
availability of the data. Sample design includes, Type of sampling, methods of selection of
sample, sample size etc. selection of the appropriate and scientific sample leads to the research
study as reliable, viable and applicable.
6. Colleting the Data: Data is the heart of any kind of research activities, without data
research in meaning less. Hence there should be a appropriate methods for collecting the data.
Data collection is not an easy task which consists of various formalities and producers. Data can
be collected from primary source such as, questionnaire method, interview schedule, observation
etc. and the secondary sources such as published and unpublished reports, records, websites etc.
7. Analysis the Data: Mere collection of data will not produce any result or information. It
should be properly classified, arranged and tabulated. Tabulated data should be analyzed with the
help of statistical tools like correlation, standard deviation, chi-squire, trend analysis percentage
etc. Analysis of the data describes the numerical information and it should be converted into a
qualitative statement.
49
8. Testing of Hypothesis: Based on the data available and analysis, formulated hypothesis
should be tested. T-test, F-test may be applied. If the calculated value of less than the table value it
may be accepted and the hypothesis is to be proved, otherwise it is said to be rejected.
9. Writing Interpretation: Writing interpretation will be the research report in a pleasure
and good manner. Appropriate and suitable interpretation with easy and simple language will help
to understand the viewers of the research report. Extra care and skill is needed to write the
interpretation.
10. Preparation of Research Report: It is the final stage of the research which gives detailed
information about the research. Preparation of the research report needs a systematic procedures
and steps final research report should be arranged in a prescribed manner and included are the
requirements of a good report. Researcher should be very careful in the fields of paper size, font
size, first style, line space, language usage while preparing the final report.

4.9 Limitations of Marketing Research

Marketing research plays a very important role in a business. By conducting marketing research
you can gather vital information which will reveal both problems and opportunities. Once you
determine what these are, then you can make the most informed decisions about your own
marketing strategies. Also, the research will allow you to examine the strategies of your
competitors. It will also give you invaluable information regarding consumers in general. And
those consumers include your current as well as your potential customers.
Following are the main limitations of Marketing Research:
It is not an exact science: Marketing Research (MR) is not an exact science though it uses the
techniques of science. Thus, the results and conclusions drawn upon by using MR are not very
accurate.
The results are very vague: The results of MR are very vague as MR is carried out on consumers,
suppliers, intermediaries, etc. who are humans. Humans have a tendency to behave artificially
when they know that they are being observed. Thus, the consumers and respondents upon whom
the research is carried behave artificially when they are aware that their attitudes, beliefs, views,
etc are being observed.
It is not a complete solution: MR is not a complete solution to any marketing issue as there are
many dominant variables between research conclusions and market response.
MR is not free from bias: The research conclusions cannot be verified. The reproduction of the
same project on the same class of respondents give different research results
More training is needed : Inappropriate training to researchers can lead to misapprehension of
questions to be asked for data collection.
Need research experience: Many researchers have ambiguity about the research problem and its
objectives. They have limited experience of the notion of the decision-making process. This leads
to carelessness in research and researchers are not able to do anything real.
Ineffective coordination: There is less interaction between the MR department and the main
research executives. The research department is in segregation. This all makes research
ineffective.
50
MR faces time constraint: The firms are required to maintain a balance between the requirement
for having a broader perspective of customer needs and the need for quick decision making so as
to have competitive advantage.
It is very costly: Huge cost is involved in MR as collection and processing of data can be costly.
Many firms do not have the proficiency to carry wide surveys for collecting primary data, and
might not also able to hire specialized market experts and research agencies to collect primary
data. Thus, in that case, they go for obtaining secondary data that is cheaper to obtain.
Consider numerous variables: MR is conducted in open marketplace where numerous variables
act on research settings.

4.10 Summary

Marketing research is the systematic gathering, recording, and analysis of data about issues
relating to marketing products and services. The goal of marketing research is to identify and
assess how changing elements of the marketing mix impacts customer behavior. In this regard
marketing research becomes an unavoidable part of the business. Marketing research consists of
various process depends upon the nature of the marketing problems. Marketing research is one of
the continuous and sustainable growing fields in the modern business with innovative approaches.

4.11 Self Assessment Questions

1. What are the various components of marketing research?

2. Briefly explain the history of marketing research

3. Discuss the process of marketing research
4. State the importance of marketing research
5. Explain the features of marketing research

6. How market research is different from marketing research?

4.12 Reference Books

- Gilbert. A. Churchill, JR.,2002. Basic Marketing Research, Chicago, The Bryden Press.

- Michael R. Czinkota, Masaaki Kotabe, 2000. Marketing Management, Vikas Publishing

House, Thomson South Western, New Delhi.
- Malhotra, 2002, Marketing Research, Pearson Education, New Delhi.
- D.D. Sharma, 2000 Marketing Research, Sultan Sons Publications, New Delhi -
R.S.N.Pillai and Bagavathi, 2005, Modern Marketing, S.Chand & Company, New
Delhi
- Harper W. Boyd, Jr. etal, 2009, Marketing Research, AITBS, Delhi.
51
 Unit - 5 : Product: An Introduction and Classification

Structure of Unit:

5.0 Objectives
5.1 Introduction
5.2 Meaning and Definition of Product
5.3 Difference between Goods and Services
5.4 Components of Product
5.5 Classification of Product
5.6 Summary
5.7 Self Assessment Questions
5.8 Reference Books

5.0 Objectives

After completing this unit, you will be able to:

• Understand what “product” really means in its fullest sense.

• Know the key differences between goods and services.
• Analyze the various components of product and various product strategies.
• Discuss the differences among the various consumer and industrial product classes.
• Point out the relevance of these product classifications for marketing strategies.

5.1 Introduction

In previous units we have emphasized the importance of matching company resources with
market opportunities as a major strategy for business success. The key element in any marketing
program is an organisation’s product. Before making decisions about pricing, promotion and place
(the other elements of marketing mix), a firm has to determine what product the firm will
introduce to the public.
The product answers various questions of marketing like -

- What will a firm sell?

- What will it distribute?

- What will it advertise?

- What will it manufacture?

- What will it promote?

52
Product when offered to consumers includes both tangible goods and services. For example, when
Maruti sells a car, it does not just sell the car. It sells a host of services along with it, such as
repairs facility, maintenance, after sales services, warranty etc. Way in which this is carried out is
by offering products that fulfil the needs and wants of selected market segments that the company
is best qualified to serve. Consequently, the management of the existing product line, making
improvements in existing products, and the development of new products are among the most
important responsibilities of marketing and business unit management. Thus we can see that the
product acts as a pivot on which the wheel of the marketing programme of a firm revolves.

Market

Product Price Place Promotion

Idea of Product Packaging Branding Warranty

Individual, Full
Physical goods/ Protection/ family, Limited
services Promotion Manufacturer
None
or dealer

Figure 5.1: Strategy Planning for Product

5.2 Meaning and Definition of Product

The term ‘product’ has been defied in narrow as well as broad sense. In a narrow sense, it is a set
of tangible physical attributes assembled in an identifiable and readily recognisable form. In a
broader sense, it recognises each separate brand as a separate product. The product is a bundle of
satisfaction that a customer buys. It represents a solution to customer’s problem.
It is in this context that the marketing definition of a product is more than just what the
manufacturer understands it to be. As Peter Drucker puts it, as long as a product is not bought and
consumed, it remains a raw material. The product is almost always a combination of tangible and
intangible benefits. For example, a refrigerator is not just merely steel, plastic, frozen gas, number
of doors, and so on, but also involves factors like after sales service, delivery and installation,
assistance in purchase of the product, dealer network, and service.
This bigger view of a product must be understood completely. It’s easy to slip into a physical
product point of view. We want to think of a product in terms of the needs it satisfies. If the
objective of a firm is to satisfy customer needs, managers must see that service may be part of the
product. When consumers purchase a product, they buy not only its tangible features but also its
intangible attributes, including functional, social and psychological benefit. For example, although
an automobile is a tangible good, it also consists of intangible attributes, such as the warranty,
customer service, or perception of the vehicle’s quality.

53
From the consumer’s viewpoint, a product is defined as a series or group of satisfactions.
Whatever be the tangible or intangible features of a product, unless the consumer perceives a
product as need-satisfier, the product fails to achieve its intended purpose.
The term product concept was used by Theodore Levitt, who said, “It refers to the augmented
product, or the aggregate of satisfactions that a user obtains.” In other words, “A product may be
an idea, physical entity (goods), or a service, or any combination of the three. It exists for the
purpose of exchange in the satisfaction of individual and organisational objectives.” According to
Peter D. Bennett, P Kotler, “Anything that can be offered to satisfy a need or want is product.”
Following are some important definition of product:
According to S.W. Stanton, “A product is a complex of tangible and intangible attributes,
including packaging, colour, price, manufacturer’s prestige, retailer’s prestige and manufacturer’s
and retailer’s services which buyer may accept as offering satisfaction of wants or needs.”
According to W. Alderson, “Product is a bundle of utilities consisting of various product features
and accompanying services”. It consists of those physical and psychological satisfactions that the
buyer receives when he buys the product, which the seller provides by selling a particular
combination of product features and associated services. In the other words, “A product is
anything that one receives in an exchange transaction; a complexity of tangible and intangible
attributes including functional, social and psychological utilities or benefits may be part of the
product.”
The production can be an idea, service, goods or any combination of these three. This definition
includes goods and supporting services such as installation, guarantees, production information,
and promises of a repair or maintenance. A product can be define as, “A product represents a
marketer’s offering as it is perceived by potential customers. The offering represents a bundle of
benefits, both tangible and intangible, designed to satisfy the needs and wants of target markets. A
product may be a physical object, a service, an idea, or some combination thereof.”
As shown in Figure 5.2 a product is a set of tangible and intangible attributes, which may include
packaging, colour, price, quality, and brand, plus the seller’s services and reputation. A product
may be a goods, service, place, person, or idea. In essence, then, customers are buying much more
than a set of attributes when they buy a product. They are buying want-satisfaction in the form of
the benefits they expect to receive from the product.

54
 .P
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uc r
t me on
q i
Pr
ua
nsu act
f
ice li
ty Co atsi
S
al
Tan hysic istics
gib P cter
ility ra
Cha

Brand
Packaging Product Concept
Aft
er
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vice
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t rep elle
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o an D
& is tio
Pr arr n
W or D tri
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o el bu
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y

Figure 5.2 : A Product is More Than Just a Product

5.3 Difference between Goods and Services

According to Philip Kotler, “A service is any act or performance that one party can offer to
another that is essentially intangible and does not result in the ownership of anything. Its
production may or may not be tied to a physical product.”
Four attributes generally distinguish services from goods: intangibility, perishability, inseparability
from the service provider, and variability in quality. Their impact is greatest for personal services -
which are usually more intangible, more perishable, more dependent on the skills of the service
provider (inseparability), and have more quality variations than rented - or owned - goods
services.
Basic Difference between Services and Goods:

1. Because goods are a physical thing, it can be seen and touched. A good is a tangible item.
When you buy it, you own it. And it’s usually pretty easy to see exactly what you’ll get.
Services are intangible. You can’t “hold” a service. And it may be hard to know exactly
what you’ll get when you buy it.

2. Goods can be stored. Surpluses in one period and can be applied against shortages in
another period. Service, on the other hand, is a deed performed by one party for another.
When you provide a customer with a service, the customer can’t “keep” it. Rather, it’s
experienced, used, or consumed.

55
3. Services are frequently inseparable. The quality of many services cannot be separated from
the service provider. Goods can be manufactured by one firm and marketed by another.
The quality of a good can be differentiated from a distribution intermediary’s quality.

4. Goods are usually produced in a factory - and then sold. By contrast, services are often
sold first, and then produced. And they’re produced and consumed in the same time frame.
Further, goods producers may be far away from the customer, but the service provider
often works in the customer’s presence.

5. Services may vary in quality over time. It is difficult to standardize some services because
of their labour intensiveness and the involvement of the service user in diagnosing his
service needs. Goods can be standardized. Mass production and quality control can be
used. It’s also hard to have economies of scale when the product is mainly service.
Services can’t be produced in large.
Generally services have four characteristics that distinguish them from goods (i) Intangibility (ii)
Perishability (iii) Inseparability and (iv) Variability.

(i) Intangibility: Means that they often cannot be displayed, transported, stored, packaged or
inspected before buying. This occurs for repair services and personal services.
(ii) Perishability: Means that they cannot be stored for future sales.

(iii) Inseparability: Means that service provider and the services which he is providing are
sometimes inseparable. When this occurs, the service provider is virtually indispensable
and customer contact is often considered as an integral part of service experience.
(iv) Variability: Means differing service performance from one purchase experience to
another, often occurs even if services are completed by the same person.
The impact of these characteristics is greatest for personal services. They are usually much more
intangible, more perishable ad more inseparable from the service provider.

5.4 Components of Product

To plan a successful product strategy, managers must know what their product is. A product is like
an onion.
It has several skins, or layers each of which contributes to the total product image.
(1) The Core Product: It is the bundle of tangible and intangible features offered in the market
place. It represents the benefits expected by the consumer when he wants to buy the product.
When a consumer buys a car he is not merely buying a journey agent. He is buying something that
will give him a feeling of comfortable and luxurious Journey. Core benefits create the basic level
of the product.

56
 Figure 5.3 : Total Product Concept
(2) Form Product: It is built around the core product and offers to consumers something
more than the physical product or service. It covers consumers’ minimum expectations from the
product and includes factors such as colour, packaging, quality, design, brand name, style, etc.
(3) The Augmented Product: It consists of value added to a product by advertising, the
reputation of the manufacturer, financing and delivery arrangement guarantees, warranties, after
sales services, customer complaint management system, replacement or return policy, customer
education and training or other benefits offered to the consumer by the seller.
Theodore Levitt’s has thrown light on the importance of augmented product in his book ‘the
marketing mode’ as “People don’t buy product; they buy the expectation of benefits....” He
believes that the future competition will exists in product augmentation: not competition between
what companies produce in their factories, but between what they add to their factory output in the
form of packaging, services, advertising, customer advice, financing, delivery arrangement,
warehousing, and other things people value.
The marketing managers must first design the core product that satisfies the consumer’s primary
need of owning that product. This is followed by designing the actual product which possesses
benefits other than the benefits of use and possession such as colour, shape, size, packaging etc.
Finally, he should design the augmented product which account for total acceptability of the
product by the consumer.
(4) The Potential Product: It consists of everything that might be done to attract and hold
customers. These offerings differ from one market to another because of varying economic and
competitive conditions. The driving force in developing these offerings is the prime goal of any
firm - retain competitive advantage. Figure 5.3 explains these product concepts.
57
As competition intensifies, markets open up, telecommunication and information networks
improve, and exposure of Indian families improves, firms will have to re-examine their product
concepts. For, an important fact to be kept in mind is that these concepts keep changing as
customers become more aware and sophisticated.

5.5 Classification of Product

All products fit into one of two broad groups, based on the type of customer that will use them.
Consumer products are products meant for the final consumer. Industrial products are products
meant for use in producing other products. There are product classes within each of these two
groups. Consumer product classes are based on how consumers think about and shop for products.
Industrial product classes are based on how buyers think about products and how they’ll be used.
Broadly products can be classified into following categories. (Figure 5.4)
Product

Consumer Products Industrial Products

:

Staples
Convenience Product Impulse Installations
Emergency

Homogeneous
Shopping Product Accessory Equipments
Heterogeneous

Agricultural
Specially Products Raw Materials
Natural

New unsought Parts

Unsought Products Components
Regularly unsought Materials

Maintenance
Supplies Repair
Operating

Professional Services

Figure 5.4 : Classification of Product A. CONSUMER PRODUCTS

Consumer Products are goods and services destined for the final consumer for personal, family, or
household use. The use of a good or service designates it as a consumer product. For example, a
calculator, dinner at a restaurant, telephone service, and an electric pencil sharpener are consumer
products only if purchased for personal, family, or household use.
According to the American Marketing Association, the consumer goods are, “Good destined
for use by the ultimate consumers or households and in such form that they can be used without
commercial processing.”

58
Consumer products classes are based on the way people buy products. Consumer products divide
into four groups:

• Convenience,
• Shopping,
• Specialty, and  Unsought.
See Figure 5.5 for a summary of how these product classes relate to each other.

Maximum Amount of
Effort Speciality Goods

Considerable Shopping Goods

Degrees of Amount of Effort
Effort
Expended by
The Consumer
Very Little or Convenience Goods
Minimum Effort

Virtually No Effort Unsought Goods

Figure 5.5: The Continuum of Consumer Goods Classification (Based on Degree of

Search Effort Expended By the Consumer)
1. Convenience Goods: A tangible product that the consumer feels comfortable purchasing
without gathering additional information and then actually buys with a minimum of effort is
termed a convenience good. Normally the shopping goes around comparing price and quality.
Many food products, candy, soft drinks, small hardware items, newspapers, small packed
confectionary fall into the convenience goods category. For marketing of these products, the
marketer relies on intensive distribution, intensive advertising and in store displays.
As described under convenience products are of three types based on how customers think about
products -not the features of the products themselves.
(i) Staple Products: These products form a part of everyday shopping list of the
consumer and form a bulk of his daily shopping. These are bought by the consumer on a
regular basis though he may be brand conscious regarding purchase of the same. Examples
of staple products are bread, butter, sugar, vegetable, soap, toothpaste etc.
(ii) Impulse Products: These are convenience products that are bought quickly (as
unplanned purchases) because of a strongly felt need. True impulse products are items that
the customer had not planned to buy, decides to buy on sight, may have bought the same
way many times before, and wants “right now”. An ice cream seller at a beach sells
impulse products. If sun bathers don’t buy an ice cream bar, the need goes away, and the
purchase won’t be made later. (iii) Emergency Products: These are convenience products
that are purchased immediately when the need is great. The consumer doesn’t have time to

59
 shop around. Price isn’t important. Examples are: ambulance services, umbrellas or
raincoats during a rainstorm.
2. Shopping Goods: A tangible product for which a consumer wants to compare quality,
price, and perhaps style in several stores before making a purchase is considered as shopping
goods. Examples of shopping goods at least for most consumers are: fashionable apparel,
furniture, major appliances, and automobiles. The process of searching and comparing continues
as long as the customer believes that the potential benefits from more information are worth the
additional time and effort spent shopping. Shopping products divide into two types - depending on
what customers are comparing: (1) homogenous and (2) heterogeneous shopping products.
(i) Homogeneous Products: These products have essentially had the same features.
For example, refrigerators, washing machines, etc. Brand names are very important since
consumers view them as assurance of quality. These products are usually price based
shopping products. Homogeneous Shopping Products are shopping products the customer
sees as basically the same and wants at the lowest price. Some customers feel that certain
sizes and types of refrigerators, television sets, washing machines, and even cars are very
similar.
(ii) Heterogeneous Products: These are non standardized and stylish in nature.
Consumers get information about and then evaluate product features, warranty,
performance, options, and other factors. The product with best combination of attributes is
purchased. Heterogeneous Shopping Products are shopping products the customer sees as
different and wants to inspect for quality and suitability. Examples are furniture, clothing,
dishes, jewellery and some cameras. Quality and style are more important than price. For
non-standardized products, it’s harder to compare prices. Once the customer has found the
right product, price may not matter - as long as it’s “reasonable”.
3. Specialty Products: These are particular brands, stores, and persons to which consumers
are loyal. People are fully aware of these products and their attributes prior to making a purchase
decision. They will make a significant effort to acquire the brand desired and will pay an above-
average price. They will not buy if their choice is un-available: Substitutes are unacceptable.
In the words of American Marketing Association, speciality goods are those “having unique
characteristics and / or brand identification for which a significant group of buyers are habitually
willing to make a special purchasing effort.” Brand loyalty influences the buying motive of
customers to a great extent. In the case of speciality goods the customers make special purchasing
efforts. Because consumers insist on a particular brand and are willing to expend considerable
effort to find it, manufacturers can use few retail outlets. Ordinarily the manufacturer deals
directly with these retailers. The retailers are extremely important, particularly if the manufacturer
uses only one is each geographic area. And where the opportunity to handle the product is highly
valued, the retailer may be quite willing to abide by the producer’s policies regarding the amount
of inventory that needs to be maintained, how the product should be advertised, or other marketing
factors.
Because relatively few outlets are used and the product’s brand name is important to buyers, both
manufacturer and retailer advertise the product extensively. Often the manufacturer pays a portion
of the retailer’s advertising costs, and the name of the store carrying the specialty good frequently
appears in the manufacturer’s ads.

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4. Unsought Products: These are the goods that consumers are not aware of and, therefore,
they do not actively seek to purchase them unless they become aware of them through promotion.
(i) New Unsought Products are products offering really new ideas that potential
customers don’t know about yet. Informative promotion can help convince customers to
accept or even seek out the product ending their unsought status. When Litton first
introduced microwave
ovens, customers didn’t know what the oven could do. Promotion showed the benefits
offered by the new product and now many consumers buy them.
(ii) Regularly Unsought Products are products like gravestones, life insurance, and
encyclopaedias that stay unsought but not unsought forever. There may be a need but the
potential customers are not motivated to satisfy it. And there probably is little hope that
these products will move out of the unsought class for most consumers. For this kind of
product, personal selling is very important. As the name suggests, a firm faces a very
difficult, perhaps impossible, advertising and personal selling job when trying to market
unsought goods. The best approach may be to make consumers aware of the product and
continue to remind them of it, so they will buy the advertised brand when the need arises.
Table: 5.1 Characteristics of Consumer Products and Marketing Consideration

Type of Product

Consumer Convenience Shopping Specialty

Characteristics
Knowledge prior to High Low High
purchase
Effort expended to Minimal Moderate to high As much as
acquire product necessary
Willingness to accept High Moderate None
substitutes
Frequency of High Moderate or low Varies
purchase
Information search Low High Low
Major Desire Availability without Comparison shopping Brand loyalty
effort to determine best regardless of price
choice and availability

Examples (a) Staple : cereal (a) Attribute based : Hellmann’s

(b) Impulse : name brand clothes mayonnaise
candy (c) (b) Price based :
Emergency : tire budget hotel
repair
Marketing
Considerations
Length of channel Long Short Short to very short
Importance of Any single store is Important Very important
61
 Retailer relatively
unimportant
Number of outlets As many as possible Few Few; often only one
in a market
Stock turnover High Lower Lower
Gross margin Low High High
Responsibility Producer’s Joint responsibility Joint responsibility
for advertising
Point-of-purchaser Very important Less important Less important
Packaging Very important Less important Less important

B. INDUSTRIAL PRODUCTS
Industrial Products are goods and services purchased for use in the production of other goods or
services, in the operation of a business, or for resale to other consumers. A customer may be a
manufacturer, wholesaler, retailer, or government or other non-profit organization.
The American Marketing Association has defined the industrial goods as, “Goods which are
destined to be sold primarily for use in producing other goods or rendering services as contrasted
with goods destined to be sold primarily to the ultimate consumers.” Industrial products classes
are based on how buyers see products and how the products are used. Capital items are treated
differently than expense items. Products that become a part of a firm’s own product are seen
differently from those that only aid production. Finally, the size of a particular purchase can make
a difference.
As shown in Table 5.2, we separate business goods into six categories. This classification is based
on the product’s broad uses. For example, a business good may be used in producing other
products, in operating an organization, and in other ways we will discuss.
1. Installations: These are used in the production process and do not become part of the final
product. Installations involve considerable consumer decision making (usually by upper - level
executives), are very expensive, last many years, and do not change form. The key marketing
tasks are direct selling from producer to purchaser, lengthy negotiations on features and terms,
having complementary services such as maintenance and repair, tailoring products to buyers’
desires, and offering technical expertise and team selling (in which various salespeople have
different expertise). Examples are buildings, assembly lines, major equipment, large machine
tools, and printing presses. Some characteristics of installations are:
(a) Small Number of Customers at Any One Time: Installations are long lasting
products so they aren’t bought very often. The number of potential buyers at any particular
time is usually small.
(b) Buying Needs Basically Economic - Buying needs are basically economic and
concerned with the performance of the installation over its expected life. After comparing
expected performance to present costs and figuring interest, the expected return on capital
can be determined. Yet emotional needs such as a desire for industry leadership and status
also may be involved.

62
 (c) Installations May Have to Be Leased or Rented: Since installations are relatively
expensive, some target markets prefer to lease or rent these. Leasing makes it easier for a
firm to make changes, if necessary. For example, many firms lease computers so they can
expand to bigger systems as the firm grows. Leasing also shifts a capital item to an
expense.
(d) Specialized Services are needed as Part of the Product: Since the expected
return on an installation is based on efficient operation, the supplier may provide special
services to assure this efficiency. Firms selling equipment to dentists, for example, may
assign a service representative to stay with the dentist until he can use the equipment
easily.
2. Accessory Equipments: Tangible products that have substantial value and are used in an
organization’s operations are called accessory equipment. Accessories do not have the same long
run impact on the firm as installations but they are still capital goods. They are less expensive and
more highly standardized than installations. These equipments are portable (movable) goods that
require a moderate amount of consumer decision - making, last a number of years and do not
become part of the final product or change its form. The marketing tasks involve providing a
variety of choices in price, size and capacity, employing a strong distribution or sales force,
stressing durability and efficiency and providing technical and maintenance support.
3. Raw Materials: Raw materials become the part of the final product. These are the items
that require processing before being incorporated in the final product. They are unprocessed
primary materials from extractive and agricultural industries. Raw Material includes:

• Goods found in their natural state, such as minerals, land, and products of the forests and the
seas.
• Agricultural products, such as cotton, fruits, livestock, and animal products, including eggs
and raw milk.
Because of their distinctive attributes, these two groups of raw materials usually are marketed
differently. For instance, the supply of raw materials in their natural state is limited, cannot be
substantially increased, and often involves only a few large producers. Further, such products
generally are of a commodity nature, must be carefully graded, and, consequently, are highly
standardized. Consider coal as an example; it is extracted in great quantities and then is graded by
hardness and sulphur content.
The characteristics of raw materials in their natural state affect how they are marketed. For
example, Prices are normally set by supply and demand, approximating the conditions of perfect
competition. As a result, individual producers have little or no control over the prevailing market
price. Because of their great bulk, low unit value, and the long distances between producer and
business user, transportation is an important consideration for natural raw materials. As a result of
the same factors, natural raw materials frequently are marketed directly from producer to business
user with a minimum of physical handling.
Agricultural products are supplied by small producers as well as larger corporate farms/firms,
typicality located some distance from their markets. The supply is largely controllable by
producers, but it cannot be increased or decreased rapidly. The product is perishable and is not
produced at a uniform rate throughout the year. Standardization and grading are commonplace for
agricultural products. Also, transportation costs are likely to be high relative to the product’s unit
63
value. Middlemen are ordinarily needed to market agricultural products because many producers
are small and markets are distant. Transportation and warehousing greatly influence effectiveness
and efficiency of distribution. Typically, there is relatively little promotional activity with
agricultural products, as compared to other types of business goods.
4. Component Parts and Materials: Components are processed expense items that become
part of a finished product. They need more processing than raw materials. They require different
marketing mixes than raw materials, even though they both become part of a finished product.
Component parts include items that are (1) finished and ready for assembly or (2) nearly
finished, requiring only minor processing (such as grinding or polishing) before being assembled
into the final product. Disk drives included in personal computers, car batteries, and motors for
appliances are examples. Component materials are items such as wire, paper, textiles, or cement.
They have already been processed, but must be processed further before becoming part of the
final product.
Component materials and parts are usually purchased in large quantities. Normally, buying
decisions are based on the price and the service provided by the seller. To ensure an adequate,
timely supply a buyer may place an order a year or more in advance. Because consumers are
concerned about price, service and reliability of supply, most fabricating products are marketed
directly from producer to user. Middlemen are used most often when the buyers are small in size
and/ or when buyers have small fill-in orders (after the large initial order) requiring rapid delivery.
The marketing task is to ensure continuity of supply, prompt delivery, actively pursue reorders,
employ extensive distribution, seek long term contracts.
5. Industrial Supplies: These are goods used in a firm’s daily operation. They can be
maintenance supplies, such as light bulbs, cleaning materials, and paint; repair supplies, such as
rivets, nuts, and bolts; or operating supplies, such as stationery pens, and business cards. They
require little consumer decision making, are very low cost on a per-unit basis, are rapidly
consumed, and do not become part of the finished product. Marketing emphasis is on availability,
promptness, and ease of ordering. Characteristics of operating supplies influence how they should
be marketed. Because they are low in unit value and are bought by many different organizations,
operating supplies. Thus, the producing firm uses wholesaling middlemen extensively. Also,
because competing products are quite standardized and there is little brand insistence, price
competition is normally stiff.
6. Professional Services: These refer to services such as those of management consultants,
market researchers, legal and advisory services etc. These services may be provided by the firm’s
own personnel or by the outside agencies. Normally, firms have their own personnel providing
such services except where these are not required on a continuous basis or where the cost of
employing these personnel is more than the benefit of services acquired through them.

Table 5.2: Characteristics of Industrial Products and Marketing Consideration

Type of Product

Characteristics Installations Accessory Raw Component Supplies

Equipment Materials Materials
Degree of
Consumer
High Moderate Low Low Very Low
Decision
Making
64
 Per-unit costs High Moderate Low Low Very Low
Rapidity of
Very low Low High High High
Consumption
Item becomes
part of
No No Sometimes Yes No
final
product
Item undergoes
No No Yes Yes No
changes in form
Major consumer Long-term Modern Continuous, Continuous, Continuous,
desire facilities equipment low-cost, low-cost, low-cost
graded specified efficient
materials materials supplies
Examples Production Forklift truck Coal Steel Light bulb
Plant
Marketing
Consideration
Nature of Short ; no Middlemen Short ; no Short; Middlemen
channel middlemen used middlemen middlemen used
only for small
buyers
Negotiation Long Medium Hard to Medium Short
period generalize
Price Varies Not main Important Important Important
competition factor
Presale/post sale Very important Important Not Important Important Very Little
service
Promotional very important Important Relatively Moderate Not too
activity little important
Brand High High None Generally low Low
preference
Advance Not usual Not usual Important; Important; Not usual
buying contract long-term long-term
contracts contacts

5.6 Summary

The first commandment in marketing is “Know thy customer,” and the second is “Know thy
product”. The relative number and success of a company’s new products are a prime determinant
of its sales, growth rate, and profits. A firm can best serve its customers by producing and
marketing want-satisfying goods or services.

A service is any act or performance that one party can offer to another that is essentially intangible
and does not result in the ownership of anything. Its production may or may not be tied to a
physical product. Four attributes generally distinguish services from goods: intangibility,
perishability, inseparability from the service provider, and variability in quality.

To plan a successful product strategy, managers must know what their product is. A product is like
an onion. It has several skins, or layers each of which contributes to the total product image. The
65
components of products are: The Core Product, Form Product, The Augmented Product, and The
Potential Product.

To manage its products effectively, a firm’s marketers must understand the full meaning of
product, which stresses that customers are buying want satisfaction. Products can be classified into
two basic categories: consumer products and industrial products. Each category is then
subdivided, because a different marketing program is required for each distinct group of products.
5.7 Self Assessment Questions
1. What do you mean by the term “Product”. Briefly explain the difference between goods
and services.

2. Explain the product concept and also put light on the different components of product.

3. What is a product? Explain the different types of product.

Is there any difference between consumer products and industrial product? If yes, then
4.
explain.
5. Explain the classification of consumer product and industrial product in detail.
6. Write chart note one:

(i) Shopping Goods

(ii)Un sought products

5.8 Reference Books

- Buell P. Victor (1985), “Marketing Management: A Strategic Planning Approach”,
International edition, McGraw-Hill Book Company, New York

- Stanton J. William (1987), “Fundamentals of Marketing”, Eighth edition, McGraw-Hill

International Edition, New York

- Evans R. Joel, Berman Barry (1995), “Principles of Marketing”, Prentice Hall,

Englewood Cliffs, New Jersey
- Monga G.S., Anand Shalini (2003), “Marketing Management”, Deep and Deep
Publications Pvt. Ltd., New Delhi

- Kumar Arun, Sharma Rachana (1998), “Marketing Management”, Atlantic Publishers and
Distributers, New Delhi

- Saxena Rajan (2006), “Marketing Management”, Third edition, Tata McGraw–Hill

Publishing Company Limited, New Delhi

- Agarwal P.K. (2010), “Marketing Management – An Indian Perspective”, Eighth Edition,

Pragati Prakashan, Meerut
- Vasishth Neeru (2008), “Business Organization”, Taxmann Allied Services (P.) Ltd., New
Delhi

66
 Unit - 6 : Product Life Cycle

Structure of Unit:

6.0 Objectives
6.1 Introduction
6.2 PLC: Stages and Strategies
6.3 Evaluating the PLC Concept
6.4 Summary
6.5 Self Assessment Questions
6.6 Reference Books

6.0 Objectives

After completing this unit, you will be able to:

• Understand the concept of product life cycle
• Study that how product is managed with an emphasis on the product life cycle.
• Understand various product life cycle stages and the strategies that firms adopt at each
stage of the life cycle.
• Evaluate the PLC
• Come across the factors affecting PLC.

6.1 Introduction

The product life cycle is a concept that attempts to describe a product’s sales, profits, customers,
and marketing emphasis from its beginning and until it’s been removed from the market. PLC
implies a time period that a product enjoys in the market, beginning with the initial time when
information is unleashed about the product in the market through advertisements, promotional
techniques, passing through various stages of popularity and then finally going for its downfall,
when it is no more in the market. There are various stages in a product life cycle, each interacting
with a different situation and challenges. Through the life cycle concept, a firm knows well in
advance that there is a limited life left for the product. It tries to evolve strategies to deal with
situations arising during different stages. The product life cycle concept can be applied to a class
(watches), a product form (quartz watches), and a brand (Seiko quartz watches). Product forms
generally follow a traditional life cycle more faithfully than product classes or brands. Product life
cycles vary a lot, both in length of time and shape (See Figure 6.1). As shown in figure, traditional
cycle has distinct periods of introduction, growth, maturity, and decline.

67
 Maturity
Growth
Decline

Sales Volume
ees
pu
R
Introduction

O
Life of Product

Figure 6.1 : Production Life Cycle

Once the product or service reaches the market, it enters the life cycle. Like people, goods and
services grow, mature and eventually decline. The product life cycle is a theoretical concept. It
serves as a conceptual base for product growth and development. According to Stanton, “In
virtually all cases decline and possible abandonment are inevitable because (i) the need for the
product disappears; (ii) a better or less expensive product is developed to fill the same need; or
(iii) a competitor does a superior marketing job.” The measure of a product’s age or its position in
the life cycle depends on three variables: time, sales, and profit (figure 6.1). Sales are determined
by other variables such as the market served and the competition. Likewise, profit is influenced by
cost and other variables.
Different products show different features with respect to their life cycles:

• Their life cycles will be different because of differences in the basic nature of the product,
their markets and their environments. Thus, each product will have different shape of the
curve.

• The time span of the PLCs also differ as some products last for a few days while others
may last for several years.

• Though products normally follow the sequence of Introduction, Growth Maturity and
Decline, some products show a reverse pattern through strong marketing strategies.
From a product planning perspective, there is interest in the product’s life cycle for several
reasons. One, some product lives are shorter than before. Two, new products often require high
marketing and other investments. Three, an understanding of the concept lets a firm anticipate
changes in consumer tastes, competition, and support from resellers and adjust its marketing plan
accordingly. Four, the concept enable a firm to consider the product mix it should offer; many
firms seek a balanced product portfolio, whereby a combination of new, growing, and mature
products is maintained. The marketing mix will usually need to be adapted to each stage of the
product life cycle. The target market, competition, and even environmental conditions change as
the product passes through its life cycle.
Assumptions of the Product Life Cycle:
The product life cycle should be considered in the light of some significant assumptions:

68
  The roots of a product do not remain fixed forever. There is no certainty whether it will die
a natural or an unnatural death. It is not certain that a product that has been launched in the
market will be there to face all the stages of its life cycle. It may collapse somewhere
before the decline stage.

 It may also happen that a product faces two or more stages at a time or there is a merger of
stages. In such a case different specific stages have no meaning for the product.

 A product that works in different markets at a time may face different stages therein. For
example, in one market it may be passing through a maturity stage whereas in another it
has already vanished.

 It is not necessary for the product to have the same period of existence in every stage. The
period may vary from stage to stage depending upon how it is fairing in the market.

6.2 PLC: Stages and Strategies

The Product Life Cycle describes the stages a product idea goes through from beginning to end. It
is divided into four major stages: (1) market introduction, (2) market growth, (3) market maturity,
and (4) sales decline. One key to life cycle management is to forecast the profile of the proposed
product’s cycle even before it is introduced. Then at each stage management should anticipate the
marketing requirements of each stage. A particular firm’s marketing mix for a product should
change during these stages for several reasons. Customers’ attitudes and needs may change
through the course of the product’s life cycle.
The introductory period, for instance, may be shortened by concentrating on broadening the
distribution or by increasing the promotional effort. A product’s life can be extended in the maturity
and saturation stages by revitalizing it through new packaging, re-pricing, or product modifications.
The makers of nylon, Jell-O, and Scotch tape-as an illustration-all have employed four different
strategies to expand sales: (1) increase frequency of the product’s use, (2) develop more varied use
of the product, (3) attract new users, and (4) find new uses for the product.
For an individual firm, successful life-cycle management depends on (1) predicting the shape of
the proposed product’s cycle even before it is introduced and (2) successfully adapting marketing
strategies at each stage of the life cycle. It is quite important that management recognize what part
of the life cycle its product is in at any given time because the competitive environment and the
resultant marketing programs will ordinarily differ depending upon the stage. A brief summary of
the competitive environment and some of the marketing reactions which typify each stage may be
useful here.
The firm may appeal to entirely different target markets at different stages of the product’s life
cycle. And the nature of competition moves toward pure competition or oligopoly. Further, total
sales of the product by all competitors in the industry - vary in each of its four stages. More
importantly, the profit picture changes too. You can see these relationships in figure 6.1.
To some degree, the collective actions of firms offering competing products in the same category
affect the shape of the sales and profit curves over the course of a life cycle. Generally, however,
companies cannot substantially affect the sales and profit curves for a product category. Thus their

69
task is to determine how best to achieve success within the life cycle. The various stages of the
PLC are described below:
A. Introduction Stage
In the market introduction stage, sales are low, as a new idea is first introduced to a market.
Customers aren’t looking for the product. They don’t even know about it. Informative promotion
is needed to tell potential customers about the advantages and uses of the new product. A high
product failure rate, little competition, frequent product modification and limited distribution
characterize the introduction stage. Both the production and marketing costs are high because of
the lack of mass production economies. In this stage, profits are negative because of low sales and
heavy distribution and promotion expenses.
Even though a firm promotes its new product, it takes time for customers to learn about it. During
this stage technical defects often appear in the product due to insufficient prior testing. These
defects may be detected and eliminated. The pioneering stage is most risky and expensive as there
are a high percentage of product failures during this period. The type of the product rather than the
sellers’ brand is emphasised in this stage
Strategy Adopted:

The strategy of entering during the introductory stage is based on the idea of building a dominant
market position and thus lessening the effectiveness of competition. According to P. Kotler
management can pursue one of the four strategies on the basis of high low price and promotion:
(A) Rapid Skimming Strategy: It consists of launching the new product at a high
price and with a high promotion level. The firm charges a high price in order to recover as
much gross profit as possible. It spends heavily on promotion to convince the market. This
strategy is adopted when the customers are unaware of the product and can pay the asking
price and the firm faces potential competition and wants to build up brand preference.
(B) Slow Skimming: This strategy is based on the assumption that a firm has sufficient
time to recover its pre-launch expenses. This happens when the technology being used by
the firm is highly sophisticated and competition will have to invest substantial resources to
acquire this technology. Further, since most competitors may not have the required
resources, competition may be limited to just one or two large companies. Another
environmental characteristic supporting this strategy is that the market size for the product
is limited and those who are aware are willing to pay any price to acquire it. Prices are
kept on higher side to earn as much as gross profit and promotion expenses are low
because the market is limited and most of the customers are aware of the product and the
potential competition is not eminent.
(C) A Rapid Penetration Strategy: It means launching the product with low price and
high promotion. The prices are kept on the lower side because the most buyers are price
sensitive. The promotion expenses are high because the market is large, the market is
unaware of the product and there is strong potential competition.
The only difference between rapid skimming and penetration is the firm’s long term
objectives. If the objective is market share and profit maximization in the long run and the
market is characterized by intensive competition or other entry barriers, a firm may choose
to enter the market with this strategy.

70
 (D) Slow Penetration Strategy: It means introducing the product with low promotion
and low price. The prices are kept low because of the price sensitive buyers and promotion
is low as the market is awareness of the product and there is some potential competition.
This strategy delivers results when the threat from competition is minimal, market size is
large, the market is predominantly price sensitive, and majority of the market is familiar with
the product. The firm’s objective is to maximize sales or profits in the long run.
B. Growth Stage
If the product gains consumer acceptance at the introduction stage, it will enter the growth stage.
This stage is characterised by an increase in the number of buyers who wish to buy the product in
addition to those who accepted the product at the introductory stage. In the growth, or market-
acceptance stage, both the sales and the profit curves rise, often at a rapid rate. Competitors enter
the market, and in large numbers if the profit outlook is particularly attractive. Sellers shift to
“buy-my-brand” rather than “try-my-product” promotional strategy.
In this stage, a new product gains wider consumer acceptance, and the marketing goal is to expand
distribution and the range of available product alternatives. Total and unit profits are high because
mass market buys distinctive products from a limited group of firms and is willing to pay for
them. To accommodate the growing market, modified versions of basic models are offered,
distribution is expanded, persuasive mass advertising is utilized, and a range of prices is available.
Strategy Adopted:
According to P. Kotler, following strategies are adopted to sustain the market growth as long as
possible:  The firm improves product quality and adds new product features with improved
styling.
 The firm adds new models.
 It enters new market segments.
 It increases its distribution coverage and enters new distribution channels.
 It shifts product awareness promotion to product conviction promotion. The firm
sometimes lowers the prices to attract the new layer of price sensitive buyers.
 Firms continue to spend huge amount of money on advertising and sales promotion. The
emphasis on promotion is not on creating awareness about the product but on promoting
the products brand same.
 Firms enjoy economies of scale and end to reduce prices to attract more buyers and higher
profits through increased sales volume.
Table 6.1: The Characteristics of the Traditional Product Life Cycle
& Marketing Implications
Stage in Life Cycle

Characteristics Introduction Growth Maturity Decline

Marketing Attract innovators Expand Maintain (a) Cut back,
goal and opinion distribution and differential (b) revive, or
leaders to product advantage as long (c) terminate
new product line as possible
71
 Industry sales Increasing Rapidly Constant Decreasing
increasing
Competition None or small Some Substantial Limited
Industry Profits Negative Increasing Decreasing Decreasing
Customers Innovators Resourceful mass Mass Market Leggards
Market
Product Mix One or two basic Expanding line Full product line sellers
models
Distribution Depends on Rising Greatest number Decreasing
product number of of outlets/ number
outlets / distributors of outlets/
distributors distributors
Promotion Informative ----- Competitive Informative
Pricing Depends on Greater range of Full line of prices Selected prices
product prices
Marketing
Implications
Overall strategy Market Market Defensive Efficiency or exit
development penetration positioning
Costs High per unit Declining Stable or Low
increasing
Product strategy Undifferentiated Improved items Differentiated Pruned line
Pricing strategy Most likely high Lower over time Lowest Increasing
Distribution Scattered Intensive Intensive Selective
strategy
Promotion Category Brand preference Brand loyalty Reinforcement
strategy awareness

C. Maturity Phase
Most products that survive the heat of competition and gain customer’s approval enter the
maturity phase. This phase is characterized by slowing of growth rates of sales and profits. In fact,
a decline in profits seems to appear now. This phase is also marked by cutthroat competition
which often tends to narrow down to a price and promotion war. It is an irony that when the firm
has established its product and generated customer preferences for its brand, competition
intensives and the firm has no other alternative but to invest resources in service augmentation and
also simultaneously undertake the task of cost reduction and, hence, price reduction.
Most of the products in the maturity stage of their life cycle remain therefore a considerably long
period of time. Marketing managers, therefore, have to make efforts to retain the products in this
stage as it is followed by the decline stage. Market growth rate ceases and firms make efforts to
increase their own share by competing with their competitors.
As prices and profits continue to fall, marginal competitors begin dropping out of the market.
Dealer’s margins also shrink, resulting in less shelf space for mature product and a general
reluctance to push the product.
Strategies Adopted:
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In order to avoid early signs of decline, managers adopt the following strategies:
(a) Market Modification:
Sales volume = No. of brand users x Usage rate per user
The company can increase the sales volume by increasing the number of brand users or by
increasing the usage rate per user or both. The marketer can increase the number of brand
users by:

• Converting non users into users  Enter new market segments

• Win competitor’s customers
Usage rate per user can be increased by:

• Most Frequent Use: Telling the customers to use the product more frequently.
Like toothpaste marketers emphasizing the use of toothpaste after each meal.
MICO emphasized replacing the spark plug once in a year.

• More Usage per Occasion: Like shampoo marketers emphasizing to use twice
rather than using once at each wash.
• New and More Varied Used: The Company can try to discover new product uses
and convincing people to use the product in more varied ways. For example,
marketer of Bernol now emphasizing Bernol as a product not only to be used for
burns but for as an antiseptic for all occasions. Vicco Termeric Cream is now
promoted as a cream for burns as well as an antiseptic cream. Amrantanzan is now
promoted as it can be used for any type of body ache as previously it was
positioned as a medicine of headache.
(b) Product Modification: Companies can modify their products by:

• Changing physical features of the products (colour, shape, design etc.) to make it
more attractive amongst existing customers.

• Improving the quality of the product in terms of its durability, taste and speed.

• Adding more features to the product to make it more attractive. The car industry,
for example, is bringing out new versions of its products with additional attractive
features at very frequent intervals.
(c) Modify the Marketing Mix: Companies attempts to change different elements of the
marketing mix to improve their sales. This can be done by:

• Price reductions provided increase in sales is sufficient to offset the losses resulting
on account of price reductions.

• Better promotion efforts by resorting to aggressive advertising and sales promotion.

• Retaining the existing distribution and retail outlets and trying to move into larger
distribution channels.

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D. Decline Phase
This is the phase when sales decline because customer preferences have changed in favour of
more efficient and better products. Customer’s value perception of the product also undergoes a
change. For most products, a decline stage, as gauged by sales volume for the total category, is
inevitable for one of the following reasons:

• A better or less expensive product is developed to fill the same need.

• People simply grow tired of a product (a clothing style, for instance), so it disappears from
the market.

• The need for the product disappears, often because of another product development.
With technological advances, entry of new firms with better products, changes in consumers’
tastes etc. the firm’s product faces intense competition in the market. Further promotional efforts
do not bring out desired results. A further decline in price also does not result in increase in sales.
Continuous fall in the product’s sales represents its declining stage. To continue with such
products would mean using firm’s scarce resources at the cost of search for replacements, an
unbalanced product mix, reduced profits and declining goodwill of the firms.
Strategy Adopted:
Perhaps it is in the sales- decline stage that a company finds its greatest challenges in life cycle
management. At this stage, as industry sales decline, many firms leave the market because
customers are fewer. Firms have three alternate courses of action:

• Reviving the product positioning, repackaging or remarketing it.

• Ensure that marketing and production programs are as efficient as possible.
• Stop selling unprofitable sizes and models. Frequently this tactic will decrease sales but
increase profits.
• Improve the product in a functional sense, or revitalize it in some manner.
They can reposition their brands; bring changes in product features with the hope to move
back into the growth stage. They can cut down their costs such as advertising, sales personnel,
R&D etc. Cost control can be important in maintaining the stability of the product in the
declining market. Streamline the product assortment by pruning out unprofitable sizes,
colours, and models.
Frequently, this tactic will decrease sales and increase profits. “Run out” the product; that is,
cut all costs to the bare-minimum level that will optimize profitability over the limited
remaining life of the product.
Dropping the product: Knowing when and how to drop products successfully may be as
important as knowing when and how to introduce new once. Certainly management should
develop a systematic procedure for phasing out its weak products.
Despite the variation in the life-span of products the concept of product life cycle is useful in
deciding the marketing strategy. The pioneering state would need heavy advertising, extensive
selling and introductory inducements. In the ‘growth stage’ the sales pick up. Subsequently, a
larger number of producers enter the market with the gaining of greater acceptance by the
consumer of the product. Now, marketing strategy is shifted to emphasise price appeals and

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product improvements. Finally, when the sales begin to level off, the management may only try to
recover costs. In the meantime new product may have been placed in the market through research.

6.3 Evaluating the PLC Concept

The product life cycle provides a good framework for product planning; but, it has not proven
very useful in forecasting. In using the product life-cycle concept, these key points should be kept
in mind:

• The stages, the time span, and the shape of the cycle.

• Such external factors as the economy, inflation, and consumer life-styles may shorten or
lengthen a product’s life cycle.

• A firm may do better or worse than the industry “average” at any stage in the cycle. An
industry’s being in the growth stage for a product does not mean success for every firm in
the market, nor does its being in the decline stage for a product mean lower sales for every
firm.

• A firm may not only be able to manage a product life cycle, it may also be able to extend it
or reverse a decline. Effective marketing may lure a new market segment, find a new
product use, or foster better reseller support.

• Some firms may engage in a self-fulfilling prophecy, whereby they predict falling sales
and then ensure this by reducing or removing marketing support. With proper marketing,
these products might not fail.
Changing Customer Needs
The most fundamental of all the environmental factors that shapes the product’s life-cycle over a
period of time is the customer’s needs. These needs changes as customers become more aware and
have higher disposable incomes leading to a change in their lifestyles and aspirations. Today we
are noticing this change occurring all over the country, largely because of the wider reach of
television (Satellite communication, dish antenna ) a single source of mass media that has
revolutionised markets and products. Where the entry barriers are low and less binding, the
product life-cycle is adversely affected because this offers an opportunity to the competitors to
enter the market and take advantage of the situation. New products start emerging with fresh life
cycles and the old ones are dropped.
Better and More Efficient Products
Today technology offers phenomenal opportunities to firms to develop more user-friendly, low
priced, and attractive products. The technology is a major factor to decide the fate of the life cycle
of the product because fast technical changes make the traditional products obsolete soon. If
people have the purchasing power they are willing to pay any price for the best technology
products. The life cycle span of the products is comparatively higher in the developing countries.
The changes are faster in the developed countries.
The financial standing of the firms is a decisive factor for a sound PLC because the prosperous
firms do not watch the game as mute spectators. They spend money if necessary and improve the
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situation in the best possible way to ensure a sound product life cycle for a long period. The
goodwill of a firm does not let the product be scared off easily. Firms that present a negative
reputation before the public spoil the life span of their products. Sometimes where money cannot
work goodwill can.

6.4 Summary

With an emphasis on the product life cycle we can study how products are created and managed,.
Product management involves creating and supervising products over their life. The product life
cycle seeks to describe a product’s sales, profits, customers, and marketing emphasis from its
inception until its removal from the market. Many firms desire a balanced product portfolio, with
products in various stages of the life cycle.
The traditional cycle consists of four stages: introduction, growth, maturity, and decline. During
each, the marketing goal, industry sales, competition, industry profits, customers, and marketing
mix change. Although the life cycle is useful in planning, it should not be a forecasting tool. One
key to life cycle management is to forecast the profile of the proposed product’s cycle even before
it is introduced. Then at each stage management should anticipate the marketing requirements of
each stage. A particular firm’s marketing mix for a product should change during these stages for
several reasons. Customers’ attitudes and needs may change through the course of the product’s
life cycle.
Executives need to understand the concept of a product life cycle, which reflects the total sales
volume for a generic product category. Each of the cycle’s four stages has distinctive
characteristics that have implications for marketing. Managing a product as it moves through its
life cycle presents a number of challenges and opportunities.

6.5 Self Assessment Questions

1. Explain the concept of product life cycle. What strategies should be adopted during
various stages of the life cycle of a product?

2. Explain the term product life cycle. Discuss the different stages in the life cycle of a
product.

3. Explain the term product life cycle. And also evaluate the PLC concept.

4. Write an essay on “PLC Stages and Strategies”

5. What are the assumptions of PLC.

6. Write Short notes on

i) Product Life Cycle ii)

Growth stage of a PLC

7. Write Short notes on

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 i) Rapid Skimming

Strategy ii) Slow Skimming

8. Write Short notes on

i) A Rapid Penetration

Strategy ii) Slow Penetration

Strategy

9. Discuss the characteristics of the traditional product life cycle & marketing implication.

6.6 Reference Books

- Buell P. Victor (1985), “Marketing Management: A Strategic Planning Approach”,

International edition, McGraw-Hill Book Company, New York

- Stanton J. William (1987), “Fundamentals of Marketing”, Eighth edition, McGraw-Hill

International Edition, New York

- Evans R. Joel, Berman Barry (1995), “Principles of Marketing”, Prentice Hall,

Englewood Cliffs, New Jersey

- Monga G.S., Anand Shalini (2003), “Marketing Management”, Deep and Deep
Publications Pvt. Ltd., New Delhi

- Kumar Arun, Sharma Rachana (1998), “Marketing Management”, Atlantic Publishers and
Distributers, New Delhi

- Saxena Rajan (2006), “Marketing Management”, Third edition, Tata McGraw–Hill

Publishing Company Limited, New Delhi

- Agarwal P.K. (2010), “Marketing Management – An Indian Perspective”, Eighth Edition,

Pragati Prakashan, Meerut

- Vasishth Neeru (2008), “Business Organization”, Taxmann Allied Services (P.) Ltd., New
Delhi

Unit - 7 : Branding, Packaging and Labeling

Structure of Unit:

7.0 Objectives
7.1 Introduction
7.2 Branding and Connected Terms
7.3 Advantages of Brand Names
7.4 Choosing the Brand Name
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7.5 Classification of Brands
7.6 Brand Image, Brand Familiarity and Brand Equity
7.7 Packaging
7.8 Basic Packaging Functions
7.9 Attributes of a Good Package and Kind of Packaging
7.10 Packaging Strategies
7.11 Criticisms of Packaging
7.12 Labeling
7.13 Summary
7.14 Self Assessment Questions
7.15 Reference Books

7.0 Objectives

After completing this unit, you will be able to:

• Study branding and packaging and their roles in product planning.

• Understand branding and connected terms.
• Know the nature and importance of brands and the characteristics of a good brand name.
• Point out how to build brand equity and brand image.
• Understand various classifications of brands.
• Point out the nature and importance of packaging and labeling  Explain various major
packaging strategies.
• Know about the various labeling types.

7.1 Introduction

Effective product management involves developing and then monitoring the various features of a
product-its brand, packaging, labeling, design color, quality, warranty, and post sale service. A
consumer’s purchase decision depends on not only on the basic good or service, but also the brand
and perhaps one or more of the other want-satisfying product feature.
A brand is a mean of identifying and differentiating the products of an organization. Branding aids
seller in managing their promotional and pricing activities. The dual responsibilities of brand
ownership are to promote the brand and to maintain a consistent level of quality. Once a brand
becomes well known, the owner may have to protect it from product counterfeiting and from
becoming a generic product.
Packaging is becoming increasingly important as seller recognize the problems, as well as the
marketing opportunities associated with it. Companies must choose among strategies such as
family packaging, multiple packaging, and changing the package.
Labeling, a related activity, provides information about the product and the seller. Many consumer
criticisms of marketing relate to packaging with labeling.

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Companies are now recognizing the marketing value of both product design and quality. Good design
can improve the marketability of a product; it may be the only feature that differentiates a product.
Projecting the appropriate quality image and then delivering the level of quality desired by customers
are essential to marketing success.

7.2 Branding and Connected Terms

Another key aspect of product planning is branding, the way a firm researches, develops, and
implement brands. Branding means the use of a new name, term, symbol, or design-or a
combination of these, to identify a product. It includes the use of brands names, trademarks and
practically all other means of product identification.

Branding is the management process by which product is branded. It is a general term covering
various activities such as giving a brand name to a product, designing a brand mark, establishing
and popularizing it. Branding is an important part of product management, which involves
researching, developing and implementing brand names, brand and marks, trade characters and
trademarks. Let’s explain these connected terms in brief:

1. Brand: The word “brand” is a comprehensive term, According to American Marketing

Association “A brand is a name, term, symbol, or design or a combination of them which is
intended to identify the goods or services of one seller or group of sellers and to differentiate them
from those of competitors”.

2. Brand Name: According to American Marketing Association, “Brand name is a part of

a brand consisting of a word, letters comprising a name which is intended to identify the goods or
services of a seller or a group of sellers and to differentiate them from those of competitor.”

Brand name is a word or combination of words used to identify a product and differentiate it from
other products. All brand names are trademarks, but not all trademarks are brand names. Brand
name is that of the brand that can be vocalized. A brand name may be, but need not be, a trade
name. For example, CocoCola is a trade name that is also the brand name of the company’s
leading product.

3. Brand Mark: According to William J. Stanton “A brand mark is the part of the brand
which appears in the form of a symbol, design or distinctive colouring or lettering.” For example:
Ganda Phenyl.

4. A Trade Character is a personified brand mark. Examples are McDonald’s Ronald

McDonald and Nirma Girl.

5. Trademark: Business firms need some techniques to differentiate their products from
those manufactured by other. This is efficiently done by trade-marking them by using letters,
words, group of words, symbol, signs or any combination of these.

A trademark is a brand name, brand mark, or trade character or combination thereof with legal
protection. When registered a trademark is flowed by R. According to Copeland, “A trademark has
been defined as: any sign, mark, symbol, word or words, which indicate the origin or ownership of a
product as distinguished from its quality and which others have not the equal rights to employ for the
same purpose.”
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The American Marketing Association defines a trademark as a brand which is given legal
protection because under the law it has been appropriated exclusively by one seller. Thus
“trademark” is essentially a legal term. All trademarks are brands and thus include the words,
letters, or numbers which may be pronounced. This is an advantage to both the manufactures and
consumers because everybody benefit form it. Trade marketing offers healthy and fair
competition. It does not allow any firm to sell any good in the market in the name of others.
It may be noted that when a brand-mark gets a legal registration it becomes a trademark.
Consumers gain an advantage in the sense that if they buy trademarked product they are assured of
the desired quality.
Legal Requirements

• It must not possess a flag or coat-arms of a foreign nation.

• It must not be identical with or confusingly similar to marks already being used in the
same field.
• It should be one which helps the public to recognize the goods.
• The word, term or slogan selected as brand or trade mark must be one which be
monopolized and used exclusively for the identification of the owners goods without
interfering with the rights of others.
• The public gives its own meanings to the words or terms it uses in trade, even as it does to
any other word and this use of a word or term cannot be controlled or restricted by the
proprietors of a brand or trade mark.
Characteristics of Good Trade Mark

• Easy to remember, simple and short.

• Distinctive and attractive to the eye and pleasant to the ear
• It should be easy to pronounce
• It should be similar to that which is already in use.
• It should be easy to illustrate
Brand name, brand marks, and trade characters do not offer legal protection against use by
competitors, unless registered as trademarks. Trademarks ensure exclusivity for trademark owners
or those securing their permission and provide legal remedies against firms using “confusing
similar” names , designs, or symbols.
6. Patents: Patents are public documents offering certain rights, privileges, titles or offices. A
patent confers the right to the use of a technical invention. When a new invention is made, it is
registered so that an exclusive right obtained by inventor to use it.
7. Copy Right: This is application in the case of books and is used in the same meaning as
that of patents. It is the sole right to reproduce literary, dramatic, musicals or artistic work. Copy
right is available for whole of the author’s life time and sixty years after his death.
Different between a Brand and a Trademark: We can differentiate between a brand and a
trademark as follows:

• When a brand-mark gets a legal registration it becomes a trademark.

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 • The major point of difference is that all trademarks are brands, but all brands are not
trademark. A brand may be legally registered or not but a trademark is always a registered
brand.
• The method of using brand and trademark may be different for different producers. Some
use different brand names and trademarks for their product-mix while others use different
brands.
• Brand name can be copied because it is not registered while trade mark cannot be copied.
If copied, a legal action can be taken against imitating firm.
• A trade mark can be used by only that marketer who had made it registered. A brand name
can be use by any number of manufactures or sellers.

7.3 Advantages of Brand Names

As described below there are several advantages of brand names to the manufacturers, distributors
and consumers:

• Vehicle of Goodwill. It works as a vehicle of goodwill to the seller, by which the article
presented for sale may be organized and made effective as a cumulative force in selling. It
may prove a valuable asset to the seller.

• Stability of Sales Volume and Price. The seller achieves greater stability of sales volume
and greater stability of price through transforming his product, to the maximum possible
degree in specialty goods.

• Healthy Brand Create a Sound Image of the Company. If it wants to bring out new
product line or categories they will be welcomed by the customers. This is because the first
impression can be a lasting impression.

• Brand Names Make the Product Easily Distinguishable and Identifiable. Markets are
often very large with a massive range of similar products. There is usually a need to
differentiate a product from that of the competitor. This is efficiently done by branding.

• Symbol of Quality. Consumers look upon the brand names as a symbol of product quality
of a product’s characteristics and feature and as a symbol of the satisfaction product
supplies.

• Insurance. Branding is an insurance of merchandise comparability when the buyer uses

more than one source of supply. Philip’s light bulbs are Philips’s light bulbs, regardless of
where purchased.

• When the brands contribute to the sound reputation of the companies, middlemen also get
benefit out of it because their effort to act between the manufacturer and the end user are
minimized.
• If a firm has one or more lines of branded goods, it can add a new item to its product mix
much more easily than a company selling unbranded merchandise.

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 • A firm can advertise its product and associate each brand and its characteristics in the
buyer’s mind. This aids the consumer in forming brand image, which are the perceptions a
person has of particular brand.
• As social visibility becomes more meaningful, a product’s prestige is enhanced via a
strong brand name.
• People feel less risky when buying a brand with which they are familiar and for which they
have a favorable attitude. This is why brand loyalty occurs.
• Branding provides another king of satisfaction to the consumer. When they are satisfied
with a particular band they do not regret paying for it. They feel it worthwhile and
reasonable.
Characteristics of a Good Brand Name: Most marketing men would agree that a good brand
should possess as many of the characteristics noted below as possible. It is extremely difficult,
however, to find a brand which possesses all of them.

• Easy to spell and read.

• Short and simple
• Adaptable to any advertising medium
• Pleasing when read or head and easy to pronounce
• Easy to recognize and remember.
• Not offensive, obscene, or negative.
• Suggestive of product benefits,
• Adaptable to packing or labeling needs.
• Legally available for use (not is use by another firms)

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7.4 Choosing the Brand Name

1.
Selection of corporate symbols
* Company name and logo
* Trade characters

2.
Creation of a philosophy
* Manufacturer, Private, and/or generic brands
* Family and/or individual branding

3.
Selection of brand names
* Extension, channel members’ name
New names, and/or licensing

4.
Decision on whether or not to seek
trademark protection

Figure 7.1 : Branding Decision Process

There are four branding decision a firm must undertake. These involve corporate symbols, the
branding philosophy, choosing a brand name and using trademarks (See figure 7.1). We will
discuss here only the “choosing a brand name”.
According to Gensamer “Selecting the right brand name is one of the most vital yet a tricky and
frustrating element in developing a new product. A good product with a lackluster name may not
sell as well as a mediocre product with an intriguing name. And once it is chosen and the product
is out on the market. Changing or modifying the name is not only difficult but also rather harmful,
getting it right the first time is essential.”
In the quest for making the brand name play well in the market the firms ought to ask themselves
a few question that are related with the impact of the brand name upon the customers. The
questions are represented in the figure 7.2.

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 Does the brand name sound different?

Does it make the competitors for a sound thinking?

Is the brand name promising?

Does the brand name speak about the benefits?

Does it take a chance?

Figure 7.2

The first hurdle to be overcome is to decide what type of name is appropriate. These are:

• Names whose meanings bear no connection to the product (Aravalli Scooters, Arrow
Shirts)
• Names that sound interesting but have no meaning (Kodak, Sony)
• Names that are borrowed from words in other language (Lux)
• Names that belong to company founders (Ford, Tata);
• Names that are company initials (HMV)
• Names that suggest a function or quality of the product (Cool Foam)
• Names that are taken from myths and legends (Atlas, Hercules), or
In each of these categories, various innumerable possibilities maybe explored. Therefore, the main
criterion should be to see whether or not the name selected will help to sell the product.

7.5 Classification of Brands

As shown in figure 7.3 brands can be classified as under:

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 Brands

(a) Individual (b) Family (c) Manufacturer (d) Dealer Brand (a) Generic
Brands Brands Brands Private Brands Brands

Figure 7.3 : Classification of Brands

1. Individual Brands
A Company using individual brands uses separate brand names for each product, when its
products vary in quality or type. If the products are really different such as Hindustan Lever Ltd.
(HLL) – Individual brands are Pears, Lux, Lifebuoy, Rexona, Close-up and for Godrej- Individual
brands are Cinthol, Ganga, Evita, glory, Marvel.
Sometimes firm use individual brands to encourage competition within the company. Each brand
is managed by a different group within the firm. Management feels that internal competition keeps
everyone alert .The theory is that if anyone is going to take business away, it ought to be one of
the company’s own brands.
Merit:

• If there is a product failure, it does not affect the whole range of products.
Demerit:

• It is a costly strategy as role of company goodwill is negligible.

2. Family Brands
Branders of more than one product must decide whether they are going to use a family brand- the
same brand name for several products-or individual brands for each product. Examples of family
brands are like Godrej (cosmetics, refrigerators, and hair dye), Kissan (jam, ketchup, squashes,
and pickle), Tata (oil, Salt, tea, machinery, watches, and steel), Maggie (sauce, noodles, pickle,
and jam), Bata (socks, shoes, sleepers).
The use of the same brand for many products makes sense if all are similar in type and quality.
The goodwill attached to one or two products may help the others, thus cutting promotion costs. It
also tends to build loyalty to the family brand and makes it easier to introduce new products.
Merit:

• If one product under a family brand does exceptionally well, there is a strong possibility
of a positive fall-out for other product under the same brand.

• If a brand is successful it would be able to sell the entire product-line.

• It is very cost effective.
• A family brand reduces the cost of product launching
• It reduces the ongoing promotional expenditure.
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Demerit:

• It will not be a good strategy, if the markets are dissimilar in term of consumer profile.
Family Brand vs. Individual Brand: A company selling more than one product must decide
whether to sell each under a separate brand or to use family brand. In other situations greater
returns can be realized through making one choice rather than the other. Such decision requires
evaluation of three factors.

• Nature of the product-line

• Promotional policy, and
• Desired market penetration
3. Manufacturing Brands
Manufacturing brands are brands created by manufacture. These are sometimes called “national
brands”because the brand is promoted all across the country or in large regions. Such brands
include Kellog’s, Whirlpool, Ford, and IBM, And creators of service-oriented firms-like
McDonald’s. These brands spend a lot of money in promoting their brands in the same way that
other products do.
4. Dealer Brands
Dealer brands are brands created by middlemen. These are sometime called “private brands”
Manufacture and dealer brand names depend on whether the product is owned by producers or by
intermediaries. If the brand is owned by manufacturer that brand is classified as
manufacture/national brand otherwise it is a dealer/private brand.
5. Generic Brand
Product seen by consumer as “commodities” may be difficult to brand. Some manufactures and
middlemen meet this problem with generic products: products with no brand at all, other than
indemnification of their contents and the manufacture of middleman. Generic products are most
common for staples-especially food product and drug items. Typically, these are offered in plain
packages at lower prices.

7.6 Brand Image, Brand Familiarity and Brand Equity

A brand image may be defined as, “the impression of a particular product that has formed in the
consumer’s mind.” The following definition will provide a clear explanation of the term. “The
image of a product associated with the brand may be clear cut or relatively vague; it may be varied
or simple; it may be intense or innocuous. Sometimes the notions people have about a brand do
not even seem very sensible or relevant to those who know what the product is really like. But
they all contribute to the customer deciding whether or not the brand is the one ‘for me’….”
Brand acceptance must be earned with a good product and regular promotion, Brand familiarity
mean how well customers recognize and accept a company’s brand. The degree of brand
familiarity affects the planning for the rest of the marketing mix-especially where the product
should be offered and what promotion is needed.

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Five levels of brand familiarity are useful for strategy planning: (1) rejection, (2) non-recognition
(3) recognition, (4) preference and (5) insistence.
Some brands have been tried and found wanting, Brand rejection means potential customers
won’t buy a brand- unless its image is changed. Rejection may suggest a change in the product- or
perhaps only a shift to target customers who have a better image of the brand. Overcoming
negative images is difficult-and can be very expensive.
Brand non-recognition means that final customer don’t recognize a brand at all, even though
middlemen may use the brand name for identification and inventory control. Examples here are
school supplies, novelties, and inexpensive dinnerware.
Brand recognition means that customers remember the brand. This can be big advantage if there
are many “nothing” brands on the market.
Most branders would like to win brand preference-which means target customers will usually
choose the brand over other brands-perhaps because of habit or past experience.
Brand insistence means customers insist on a firm’s branded product and are willing to search for
it. This is an objective of many target marketers. A good brand name can help build brand
familiarity. It can help tell some-thing important about the company or its product.
Building a brand’s equity consists of developing a favorable, memorable, and consistent image
which is no easy task. Product quality and advertising play vital roles in this endeavor. However, if
substantial brand equity can be achieved, the organization that owns the brands can benefit in
several ways:

• The widespread recognition and favorable attitudes surrounding a brand with substantial
brand equity can facilitate international expansion.

• The brand itself can become an edge over competition, what we call a differential
advantage influencing consumers to buy a particular product.

• Because it is expensive and time-consuming to build brand equity, it creates a barrier for
companies that want to enter the market with a similar product.

• Brand equity is often used to expand a product mix, especially by extending a product line.
• Brand equity can help a product survive change in the operating environment, such as a
business crisis or a shift in consumer tastes.

7.7 Packaging

Packaging is the part of product planning in which a firm researches, design, and produces its
package(s). A package consists of a product’s physical container, outer label, and/or inserts. The
physical container may be a cardboard, metal, plastic, or wooden box or cloth wrapper, a glass,
aluminium, or plastic jar or can, a paper bag or some other material: or combination of these.
Products may have more than one container.
Packaging should be distributive with Packing. According to Stanton, “Packaging’ is the general
group of activities which concentrate in formulating the design of package, and producing an
appropriate and attractive container or wrapper for the product” Packing means the wrapping and
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creating of goods before they are transported or stored.” It is a physical action which provides a
handling convenience.
Indian Institute of Packaging has defined packaging as ‘The functions of package, selection,
manufacture, filling and handling.” Packaging obviously is closely related to labeling and
branding because the label often appears on the package and the brand is typically on the label. A
package defines the space in which a product is contained. The package serves two primary
functions (1) product protection and (2) information about the product and its use. Superior
package design may be enough to attract buyers even when the package contains a parity product.
A package performs a utilitarian function by increasing the product value. It performs
communication function and creates a brand image. It creates an interest is the minds of customer
and impulse to buy.
Packaging should protect the product in transit and in the warehouse; on the retail shelf, and in the
home or workplace until the contents are consumed. Packaging information will include some or
the entire of following: product and brand identification, price, promotional message; instruction
for use; and warranty.

7.8 Basic Packaging Functions

The basic packaging functions are as follows:

1. Protection: A utilitarian as well as a marketing reason for packaging a product is to
protect it on its route from the manufacturer to the consumer or industrial user, and in some cases
even during its life with the customer. Compared with bulk items, packaged goods generally are
more convenient, cleaner, and less susceptible to losses from evaporation, spilling, and spoilage,
2. Identification: When goods are stored in warehouse or in godowns, till they are
transported elsewhere or used, they need to be identified as to type and make, and be clearly
distinguished form one brand to another. Most packages, therefore, bear the name of the product,
its maker, and its ingredients, instruction for use, safety warnings or limitation on use. Product of
one manufacturer can be easily identified by the consumer from the rival’s as packaging creates
individuality and helps quick identification.
3. Usage: Packaging allows a product to be easily used and restored. It may even be reusable
after a product is depleted.
4. Communication: Packaging communicates a brand image, provides ingredients and
direction and displays the product. It is major promotion tool.
5. Promotional Appeal. Product must sell themselves. This is possible if they are placed in
more attractive and eye-appealing package. Several factors contribute to package’s promotional
appeal. The package must be of a suitable size, shapes, texture, or a startling colour. Colour on
package often attracts people, who associate certain feeling and connotations with specific colour.
For example, red is associated with fire, blood, danger, and anger; yellow suggest sunlight,
caution, warmth and vitality; blue can imply coldness, sky, water and sadness.
6. Segmentation: Packaging can be tailor-made for a specific market group. If a firm offers
two or more package shapes, sizes, or design, it may employ differentiated marketing.

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7. Channel Cooperation: Packaging can address wholesaler and retailer needs with regard
to shipping, storing, promotion and so on.
8. Attractiveness: Packaging enhances the appearance of the product. The design and the
label on the package printed matter, picture, lay-out or get up of the package, colour combination
all are special means of attracting consumers.
9. New-Product Planning:-New packaging can be meaningful innovation for a firm and
stimulated its sales.
10. Management may package its production in such a way as to increase profit possibilities. A
packagemay be so attractive that customers will pay more just to get the special package-even
though the increase in price exceeds that additional cost of the package. Also an increase in ease
of handling or a reduction in damage losses will cut marketing costs.

7.9 Attributes of a Good Package and Kind of Packaging

A well designed and attractive package must have informative labeling. The headlines,
illustrations, guidelines, and selling point on the package must be clear and prominent so that the
matter is readable by every shopper at a glance. Visibility of the product in the package helps to
sell the product better. According to I.B. Steel, packages to be effective must possess the
following qualities:

• It must build confidence.

• It must look clean and sanitary.
• It must be convenient to handle to carry out of the store and to use.
• It must look like good value.
• It must attract attention.
• It must tell the product story- What is it? What size? How Much?
• It must deserve a preferred display.
• It must be convenient to stock and display.
• It must prevent spoilage the selling period.
• It must resist soiling.
According to Seibert a goods package must : (i) protect the contents: (ii) meet retailer
requirement (iii) meet consumer requirement; (iv) meet trade characters, and (v) be easily
identifiable.
Sound packaging is important; it has to be catchy because it is the first thing sighted by the
customers. They may not see a product but may be influence by the following aspect of
packaging:

• Eco-friendliness of the packaging

• The condition of the product,

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 • The role of packaging in the physical distribution, and
• The promotion and information through packaging
Kinds of Packaging
A number of factors like the nature of contents, the requirement of distribution, the possible kind
of handling, the routes of the journey while exporting them and many other factors decide the kind
of packaging to be done:
1. Distribution Packaging is called for when the idea is to preserve the contents right from
production to consumption. Such a packaging saves the contents from getting damaged because it
has to pass through various channel of distribution.
2. Consumer Packaging is ideal where the eye catching aspect is not sufficient unless the
packaging contains the required details and provides adequate information values.
3. Identical Packaging is generally done for the umbrella family branded goods. It is
convenient to do identical packaging for similar types of goods or brands. It can also be called
economical packaging because the decision taken and the cost incurred affect overall packaging.
4. Re-use Packaging is mostly prevalent among the household products like ghee, coffee, tea
etc. where the consumer can re-use the containing jar, box, etc. Most of the FMCGS are packaged
like this.
5. Then comes Multipurpose Packaging where the homogeneous or heterogeneous units of
a product are placed in a single container. This means that just like family packaging,
multipurpose packaging trends to serves a variety of purpose through packaging.

7.10 Packaging Strategies

In managing the packaging of product, executives must make the following strategic decisions.
Packaging the Product Line: A company must decide whether to develop a family resemblance
when packaging related product. Family packaging uses either highly similar packages for all
products or packages with a common and clearly noticeable feature. When new products are added
to a line, recognition and images associated with established product extend to the new ones.
Family packaging makes sense when the products are of similar quality and have a similar use.
Multiple Packaging: For many years there has been a trend towards multiple packaging, the practice
of placing several units of the same product in one container. Dehydrated soups, motor oil, beer, golf
balls, building hardware, candy bars, towel, and countless other products are packaged in multiple
units.
Reuse Packaging: Another strategy to be considered is reuse packaging. Should the company
design and promote a package which can serve other purpose after the original contents are
consumer? Reuse packaging should stimulate repeat purchase. If a person purchases a certain
brand of peanut butter in order to collect a set of drinking glasses and, once h has them, switches
to another brand, the dual-use packaging strategy had been of little help to the peanut butter
manufacture.

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Changing the Package: When detected, a company needs to correct a poor feature in an existing
package, of course. Unless a problem was spotted, firms stayed with a package design for many
years. Now for competitive reason, package strategies and tactics are reviewed annually along
with the rest of the marketing mix.

7.11 Criticisms of Packaging

The packaging practices of some firms have been heavily criticized because of their impact on the
environment and scarce resources, high expenditures on packaging, questions about the honesty of
labels and the confusion caused. The social-economic criticisms of packaging are:

• Packaging that Depletes Natural Resource. This problem is magnified by firms that
prefer large-than-necessary containers. This criticism has been partially addressed through
the use of recycled material in packaging. A point in favor of packaging is that it
minimizes spoilage, thereby reducing a different type of resource waste.

• Forms of Packaging that are Health Hazards. Government regulation banned several
suspect packaging materials, notably aerosol cans the used chlorofluorocarbons as
propellants. Just as important, a growing number of companies are switching from aerosol
to pump dispensers.
• Disposal of Used Package. Consumer’s desire for convenience in the form of throwaway
containers confects with their stated desire for a clean environment. Some discarded
packages wind up as litter, others add to solid waste in landfills. This problem can be eased
by using biodegradable materials in packaging.

• Deceptive Packaging. A common problem is that the package size conveys the impression
of containing more than the actual contents. Government regulations plus greater integrity
on the part of business firms regarding packaging have alleviated this concern to some
extent.

• Expensive Packaging. Even in seemingly simple packaging, such as for soft drinks, as
much as one-half the production cost is for the container. Still, effective packaging reduces
transportation costs and spoilage losses.
Marketing executives are challenged to address these criticism. At the same time, they must retain
or even enhance the positive feature of packaging, such as product protection, consumer
convenience, and marketing support.

7.12 Labeling

Obviously there is a close relationship among labeling, packaging, and branding. A label is the
part of a product that carries information about the product and the seller. A label may be part of a
package, or it may be a tag attached to the product. A label indicates the product’s brand name, the
company logo, ingredient, promotional messages and instruction for use. The label is a strong
sales tool. It is an integral part of the point of purchase advertising. It is designed to help the
promotion of a product. The arrangement of type, the illustrations, and the color are chosen to

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attract the consumer’s eye, make a package distinctive, and encourage recognition by the
consumer who often views it in the midst of many other products.
Classification of Labels: There are three primary kinds of labels as shown in figure 7.4:

Labels

(a) Brand (b) Grade (c) Descriptive

Label Label Label

Figure 7.4 : Types of Labels

1. Brand Label. It is simply the brand alone applied to the product or to the package, such as
some cloths carry the brand label “Sanforised.” Brand labeling is an acceptable form of labeling,
but it does not supply sufficient information to a buyer
2. Descriptive Label: It gives objective information about the product’s use, construction,
care, performance, and/or other pertinent feature. On a descriptive label for a can of corn, there
will be statement concerning the type (golden sweet), style, can size, number of servings, other
ingredients, and nutritional contents. Descriptive label provide more product information but not
necessarily all that is needed or desired by a consumer in making a purchase decision
3. Grade Label: It identifies the product’s judged quality with a letter, number, or word.
Canned peaches are grade-labeled A, B, and C, and corn and wheat are grade-labeled 1 and 2.
Government Policy Regarding Packaging and Labeling
Indian Government issued Packaged Product Regulation 1975 on 28 July 1775 and it became law
by 1st January 1976. The basic purpose of this law is to secure the distribution and availabilities of
packaged commodities at fair prices. The main elements of this act are:
1. Nobody would pack the product to sell till he labels the product furnishing the following
information:
(a) Identification of packaged product.
(b)Measure of the packaged product(c) Date of packaging with
month and year (d) Selling price of packet.
2. Nobody would sell the packet to any person or organization which does not contain the
pointspresented in first element.
3. The retailer would not sell the product on higher rates than mentioned on packet.
4. Each packet would contain the manufacture’s full name and address.
5. The weight or number mentioned on the packet would not be conditional.
6. The products whose price are controlled by government, the government controlled rates
would bementioned
7. In the declaration of the weight of the product, the weight of the wrapper would not be
included.
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 8. If it is not possible or unpractical to write net contents on the label then there should be an
attachedlevel containing net contents and price.
This regulation does not apply to those commodities which are used as raw materials or sold as a
wholesale packet or used as eatables. It also does not apply to very small packets like Bidi and
Agarbattii. It is applicable to those items which are general customer consumption items like tea,
coffee, vegetable oil, soap, biscuit, cement, cosmetic etc.

7.13 Summary

Branding is the procedure a firm follows in planning and marketing its brands. A brand is a name,
term, design, or symbol (or combination) that identifies a goods or service. A brand name is a
word; letter (number) that can be spoken .A brand mark is a symbol, design, or distinctive coloring
or lettering. A trade character is a personified brand mark. A trademark is a brand name brand
mark, or trade character given legal protection. There are four branding decision a firm must
undertake. These involve corporate symbols, the branding philosophy, choosing a brand name and
using trademarks. Brands can be classified as individual brands, family brands, manufacturing
brands, dealer brands and generic brand.
A brand image may be defined as the impression of a particular product that has formed in the
consumer’s mind. Brand acceptance must be earned with a good product and regular promotion,
brand familiarity mean how well customers recognize and accept a company’s brand. The degree
of brand familiarity affects the planning for the rest of the marketing mix-especially where the
product should be offered and what promotion is needed. Five levels of brand familiarity are
useful for strategy planning: (1) rejection, (2) non-recognition (3) recognition, (4) preference and
(5) insistence. Building a brand’s equity consists of developing a favorable, memorable, and
consistent image which is no easy task. Product quality and advertising play vital roles in this
endeavor. However, if substantial brand equity can be achieved, the organization that owns the
brands can benefit in several ways.
Packaging is the part of product planning in which a firm researches, design, and produces its
package(s). A package consists of a product’s physical container, outer label, and/or inserts. The
physical container may be a cardboard, metal, plastic, or wooden box or cloth wrapper, a glass,
aluminium, or plastic jar or can, a paper bag or some other material: or combination of these..
There are some packaging functions: protection, identification, usage, communication,
promotional appeal, segmentation, channel cooperation, attractiveness, and new-product planning.
The packaging practices of some firms have been heavily criticized because of their impact on the
environment and scarce resources, high expenditures on packaging, questions about the honesty of
labels and the confusion caused. Packaging has been criticized in terms of environmental, safety,
and other issue.
Obviously there is a close relationship among labeling, packaging, and branding. A label is the part
of a product that carries information about the product and the seller. A label may be part of a
package, or it may be a tag attached to the product. A label indicates the product’s brand name, the
company logo, ingredient, promotional messages and instruction for use. The label is a strong sales
tool. It is an integral part of the point of purchase advertising. It is designed to help the promotion of
a product. The arrangement of type, the illustrations, and the color are chosen to attract the
consumer’s eye, make a package distinctive, and encourage recognition by the consumer who often
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views it in the midst of many other products. There are three primary kinds of labels as: brand label,
descriptive label, grade label.

7.14 Self Assessment Questions

1. List five brand names, which you think are good ones and five which are poor. Explain the
reasoning behind your choice.

2. What is packaging? What are the basic functions of packaging? Give the characteristic of a
good packaging.

3. What do you understand by Brands? Distinguish them with Trade Marks. What
considerations are taken in selecting and effective brand name?

4. What is Brand? Differentiate it from Trade Mark?

5. Write a short note on ‘Brand Classification.’

6. What are the advantages of brand names?

7. Explain different kinds of brand names. Distinguish between Family Brand and Individual
Brand.

8. Explain brand familiarly, brand image and brands equity in detail.

9. “The main objectives of packaging are protection, brand differentiation and identification,
sales promotion and handling convenience.” Discuss

10. Explain various major packaging strategies and various kinds of packaging.

11. What do you mean by labeling? Explain the various classifications of labels.

12. Write short note on

(i) Govt. policies regarding packaging and labeling
(ii)Criticism of packaging

7.15 Reference Books

- Buell P. Victor (1985), “Marketing Management: A Strategic Planning Approach”,

International edition, McGraw-Hill Book Company, New York

- Stanton J. William (1987), “Fundamentals of Marketing”, Eighth edition, McGraw-Hill

International Edition, New York

- Evans R. Joel, Berman Barry (1995), “Principles of Marketing”, Prentice Hall,

Englewood Cliffs, New Jersey

- Monga G.S., Anand Shalini (2003), “Marketing Management”, Deep and Deep
Publications Pvt. Ltd., New Delhi

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- Kumar Arun, Sharma Rachana (1998), “Marketing Management”, Atlantic Publishers and
Distributers, New Delhi

- Saxena Rajan (2006), “Marketing Management”, Third edition, Tata McGraw–Hill

Publishing Company Limited, New Delhi

- Agarwal P.K. (2010), “Marketing Management – An Indian Perspective”, Eighth Edition,

Pragati Prakashan, Meerut

- Vasishth Neeru (2008), “Business Organization”, Taxmann Allied Services (P.) Ltd., New
Delhi

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 Unit - 8 : Price: An Introduction

Structure of Unit:

8.0 Objectives
8.1 Introduction
8.2 Price: Overview
8.3 Pricing Objectives
8.4 Price and Non Price Competition
8.5 Importance of Price Decisions
8.6 Factors Affecting Pricing Decisions
8.7 Principles of Effective Pricing Decisions
8.8 Summary
8.9 Self Assessment Questions
8.10 Reference Books

8.0 Objectives

After completing this unit, you will be able to:

• Define the term ‘price’ and ‘pricing decisions’.

• Demonstrate the significance of price in our economy and study its relationship with other
marketing mix variable.
• Differentiate between price and non price competition
• Understand how pricing objectives should guide pricing decisions.
• Examine the factors affecting pricing decisions.
• Explain the principles of effective pricing decisions.

8.1 Introduction

Price is the exchange value of a product. As a significant element of the marketing-mix it requires
crucial decisions to be made about it. It is the only element of the marketing mix which generate
revenue otherwise all the elements have cost. Price planning is systematic decision marking by an
organization regarding all aspects of pricing. There are numerous factors that come in the way of
decision-markers while they are working on the determination of price. In various cases the choice
of the consumer greatly depends upon the price of the product, especially in less developed
countries where the consumer is bound to give a second thought to buying a product or service
that seems to be out of his pocket just because of high price. But while moving to free economies,
people get greater exposure and they pay attention to other aspects of product apart from its price.
The term price refers to fair price by which the consumer feel satisfied in every respect. It is not
only for earning greater revenue, it is also for social purpose that considerable thought is given to
those from whom the revenue is earned.
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8.2 Price: Overview

A price represents the value of a good or service for both the seller and the buyer. Price planning is
systematic decision making by an organization regarding all aspect of pricing. An important
element of marketing mix that generates revenue for the firm is pricing. Pricing deals with
determining the price of the product, at which it is transferred from the seller to the buyer.
Traditionally, price was considered as the most important factor in influencing the buyer’s
decision to buy the product. Latter this was substituted by a host of non-price consideration such
as brand image, advertising, packaging, design etc. Though non-price considerations largely
affect the affluent market decisions, price factor continues to remain an important marketing tool
that affects both, the seller and the buyer.
Pricing can be defined in two senses:

• Narrow Sense
• Wide Sense
As a narrow concept, it is the amount of money charged by the seller for the product or service
that is sold to buyers. Though sellers wish to charge a high price for products, buyers wish to pay a
low price for the same. They both, thus, arrive at a mutually acceptable price through negotiation
and bargaining.
As a wider concept, price is not just the exchange value for the product transferred, it also reflects
value for all the benefits that will accrue to the buyer on use of a given product or a service. In
other words, from a broader perspective, price is the mechanism for allocating goods and services
among potential buyers and for ensuring competition among sellers in an open marketplace. If
demand excess supply, price are usually bid up by consumers. If supply exceeds demand, prices
are usually reduced by sellers.
A lot of words are substitutes for the term price, including admission fee, membership fee, rate,
tuition, service charge, donation, rent, salary, and interest. No matter what it is called, a price refer
to all the terms of purchase: monetary and nonmonetary charges, discounts, handling and shipping
fees,
credit charges and other forms of interest, and late-payment penalties.

Price is What You pay For What You Get

Interest Use of Money
Tuition Education
Commission Sales person’s services
Rent Use of living quarters or a piece of equipment for a period
time
Fare Taxi ride or airline flight
Salary Services of an executive or other white-collar worker
Wage Services of a blue-collar worker
Retainer Lawyer’s or consultant’s services over a period of time.
Dues Membership in a union or a club
Toll Long-distance phone call or travel on some highways
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 Fee Services of a physician or lawyer

Meaning of Pricing Decision

According to Converse, “Decisions concerning price to be followed for a period of time may be
called price policies.” The determination of price is a very important and crucial decision. It
affects all parties involved in the production to selling process and the amount of profit. It is a
source of income to distributors. It is important for consumers because all their buying decisions
are influenced by price. It reflects the purchasing power of the regulator of production and
allocator of resources. It is the instrument most generally identified with a market economy. A
free-enterprise system cannot flourish without price competition. It is the best measure of demand.
It serves to bring the supply of goods and services produced into equilibrium with the quantity
demanded. Among various marketing decisions, the decision relating to pricing of products are the
most significant because they are the very basis of survival and growth of the firm.

8.3 Pricing Objectives

Every marketing activity including pricing should be directed towards a goal. Thus management
should decide on its pricing objectives before determining the price itself. Yet, as logical as this
may sound, few firms consciously establish a pricing objective. Pricing objectives should flow
from company level objectives. Pricing objectives should be clearly stated because they have a
direct effect on pricing policies and of the methods used to set prices.
There are three general pricing objectives form which a firm may select: sales- based objectives,
profit-based objectives, and status quo-based objectives. See Figure 8.1. With sales-based
objectives, a firm is interested in sales growth and/or maximizing market share. With profit-based
objectives, the firm is interested in maximizing profit, earning a satisfactory profit, optimizing the
return on investment, and/or securing an early recovery of cash. With status quo-based objectives,
it seeks to avoid unfavorable government actions, minimize the effects of competitor actions,
maintain good channel relations, discourage the entry of competitions, and a stabilize price.
A company may pursue more than pricing objective at the same time, such as increasing sale by 5
to 10 percent each year, achieving a 15 per cent return on capital investment, and keeping price
near those of competitors. It may also set distinct short and long run goals. In the short run, it may
seek high profit margins on new products; in the long run these profit margins would drop to
discourage potential competitors.

Sales-Based Status Quo-Based

Pricing * Meeting Competition
* Volume Objectives
* Market share * Non Price Competition

Profit-Based
* Profit maximization
*Satisfactory profit
* Return on investment
* Early recovery of cash

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 Figure 8.1: Pricing Objectives
Recognize that all these objectives can be sought and hopefully attained through pricing that is
coordinated with order marketing activities such as product design and distribution channels. And
all these objectives are ultimately aimed satisfactory performance over the long run. For a
business that required ample profits. Now we will discuss pricing objectives in detail:
I. Profit Based Pricing Objectives
A company with profit based pricing objective orients its strategy toward some type of profit
goals. With profit-maximization goals, high profits are sought. With satisfactory-profit goals,
stability over time is desired; rather that maximize profits in a given year. With return-on-
investment goals, profits are related to investment cost; these goals are often pursued by regulated
utilities as a way of justifying rate increases. With early-recovery-of-cash goals, high initial profits
are sought because firms are short of funds or uncertain about their future. In other sense profit
based objectives are:
(a) Maximize Return on Investments and Profits: Many firms set a price in order to
maximize their current profits and returns on investments. They estimate the current
demand and cost associated with different alternative prices and then selects the price that
ensures maximum current profits, returns or investment. This objective needs the firm’s
knowledge of cost and demand. In reality, it may be difficult to precisely estimate the
demand function, or even the cost function. Besides, this objective does not consider the
influence of other marketing mix variables on the customer’s demand.
(b) High Cash Flow: Some organization set prices to recover cash as fast as possible.
Financial managers are understandably interested in quickly recovering capital spent to
develop products. This objective may have the support of the marketing manager who
anticipates a short product life cycle. Although it many be acceptable in some situations,
the use of cash flow and recovery as an objective oversimplifies the value of price in
contributing to profits. A disadvantage of this pricing objective could be high prices, which
might allow competitors with lower prices to gain a large share of the market.
II. Sales-Oriented Pricing Objectives
In some companies, management’s pricing is focused on sales volume. As described under the
pricing goal may be to increase sales volume or to maintain or increase the firm’s market share:
(a) Increase Sales Volume: This pricing goal of increasing sales volume is typically
adopted to achieve rapid growth or to discourage other firms from entering in market. The
goal is usually stated as a percentage increase in sale volume over some period.
Sometimes companies are willing to incur a loss in the short run to expand sales volume or
meet sales objectives.
(b) Maintain or Increase Market Share: Market share, which is a product’s sale in
relation to total industry sales, can be an appropriate pricing objective. Many firms
establish pricing objectives to maintain or increase market share. Maintaining or increasing
market share need not depend on growth in industry sales. Remember that an organization
can increase its market share even though sales for the total industry are decreasing. On the
other hand, an organization’s sales volume may, in fact, increase while its market share
within the industry decreases, assuming that the overall market is growing .

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III. Status Quo Pricing Objectives
Managers who are satisfied with their on growth situation and want to reduce risk sometimes
adopt status quo objective – “don’t rock the pricing boat” objectives. They may be stated as
“stabilizing prices,” “meeting competition,” or “avoiding competition.” Maintaining stable prices
discourage price competition and avoid the need for hard decision.
On the other hand, a status quo pricing objective can be part of an aggressive marketing strategy
focusing on non-price competition- aggressive action on one more of the Ps often then Price.
IV. Other Objectives:
(a) Survival of the Firm: To begin with, if firms are not able to earn huge profits, they
will try to recover their variable costs and a part of fixed costs also to ensure their survival
in the market. As a short-run objectives, firm wish to survive in the market in the hope to
achieve the long-run objectives of not only survival but also growth and prosperity. The
objective of pricing is, thus, to keep the plant and machinery in operation so that firms
continue to produce and sell products to satisfy market demands in the hope of getting a
bigger share of the market in future.
(b) Balancing Price over Product Line: Product line pricing to maximize long term
profits is another pricing objective. The product line of a firm may have high popular as
well as low image product items. Further, there may be fast selling product items as well as
not so fastselling items. A pricing objective has to consider all these different categories of
products.
(c) Product Quality Leadership: High price can be indicative of high quality also. An
advertisement which says ‘Pay more-Get more’ can create an impression in the minds of
the consumer that a higher price is offering higher benefits. Firms selling their products at
higher prices will succeed in markets only if the quality assured is actually provided by
them to consumers.
(d) Exploit Competitive Position: Another pricing objective is to exploit the firm’s
competitive position in the market-place. This presupposes that the firm is a leader in the
market. This leadership may arise form the customer’s perception of its product quality or
technology. Being the leader, a firm may adopt either a skimming, penetrating or
geographic pricing policy or other strategy. We shall discuss these strategies later in the
unit.

8.4 Price and Non Price Competition

Price Competition
Under price competition, a firm in its quest for attracting more customers keeps its prices low, but
along with a major disadvantage, i.e. the related services are also decreased. There is two more
technique of price competition, (i) switching to price change or (ii) reacting to the customer’s
price changes.
(a) Switching to Price Changes: Switching to price changes means that an
organization itself takes an initiative to make changes in its own prices either by cutting or

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 by increasing the prices. Different situations give rise to a firm’s decision about cutting or
increasing the price. It generally resorts to price cuts when it has to clear its stock by
boosting up sales. When all the strategies of increasing the sales volume fail then price-cut
works. Another situation when price-cuts prove successful is when a firm has to capture
the market share in the face of cut throat competition. Some companies from the initial
stage itself keep their price low in the quest for dominating the market.
Price change can also mean an increase in price. Raising the price mean: higher profit
margins. A firm tends to increase the price when the costs of manufacturing and other
overheads are high. In that case it is natural that the firm will try to recover costs from the
customer. Sometimes a firm keeps the prices high for quality reasons to benefit from the
common thinking that a high priced product is always superior in quality.
(b) Reacting to Competitor’s Price Changes: Here a firm keeps a watch on the
competitor’s policies and strategies regarding the prices. It responds only if necessary. The
firm should not initiate reaction in haste. It should make a deep analysis of its own product
related aspects to take the right step. How does it know whether a particular response to a
particular step of the competitor will be fruitful or not? For this it is better to study
beforehand every type of response to every possible change in the competitors’ prices. This
way the firms will be saved from many of the future problems.
In price competition, sellers move along a demand curve by raising or lowering prices. Prices
competition is a flexible marketing tool because price can be adjusted quickly and easily to reflect
demand, cost or competitive factors. Yet, of the entire controllable marketing variable, price is the
easiest for a competitor to copy. This may result in “me-too” strategies or even in price wars.
Furthermore, the government may monitor anti-competitive aspect of price strategies.
Price

P1

P2
Demand Curve

Q1 Q2 Quantity

Figure 8.2 : Price Competition

Analysis of figure 8.2: A company operating at P1Q1 may increase sales by lowering its price to
P2. This will increase demand to Q2. A firm relying on price competition must lower its prices to
increase sales.

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Non Price Competition
In non price competition, sellers shift consumer demand curves by stressing the distinctive
attributes of their products. This lets firms increase unit sales at a given price-or sell their original
supply at a higher price. The risk with a non price strategy is that consumer may not perceive a
seller’s product as better than a competitor’s. People would then buy the lower-price item believed
to be similar to the higher priced
Price

P1

P2
Differentiated product

Undifferentiated product

Q1 Q2 Quantity

Figure 8.3 : Non Price Competition

Analysis of figure 8.3: Through non price competition, the firm shifts the consumer demand
curve to the right by successfully differentiating its products from competitor. This enables the
firm to: (a) Increase demand from Q1 to Q2 at price P1 or (b) Raise the price from P1 to P2 while
maintaining a demand of Q1.

8.5 Importance of Price Decisions

Henry Ford once stated, “Our policy is to reduce price, extend operations and improve the
product.” It shows the importance of pricing decisions in a marketing-mix. Price is a matter of
vital importance to both the seller and the buyer in the market place. There cannot be marketing in
a money economy without prices. Prices denote the volume of a product or service expressed in
money. Pricing decision interconnect marketing actions with the financial objective of the
enterprises. According to Evans and Berman, followings are some of the basic ways in which
pricing is related to other marketing and firm’s variables.

• From a distribution perspective, the prices charged to reseller must adequately compensate
them for their functions, yet be low enough to be competitive with other brands at the
wholesale or retail level.

• There may be conflict in a distribution channel if a manufacture tries to control or suggest

final prices.

• Prices ordinarily vary over the life of a product, from high price to gain status-conscious
innovators to low price to lure the mass market.

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 • A sales force needs some flexibility in negotiating prices and terms particularly with major
business accounts.

• Customer service is affected since low price are usually associated with little customer
service.
• As costs change, decision must be made as to whether to pass these changes on to
consumer, absorb them, or modify product feature.

• Product lines with different features-and different prices-can attract different market
segment.
• The roles of marketing and finance personnel must be coordinated. Marketers often begin
with the prices that people are willing to pay and work backward to ascertain company
costs.
Finance people typically start with costs and add desired profit to set price.
It is evident that prices play a major role in determining which firms survive and which ones
don’t. The survey represented in the Table 8.1 Pricing is considered the most crucial marketing
activity by manufactures of consumer and industrial goods.
Table 8.1: Rankings of Marketing Activities by Different Types of Industries

Manufacture of Manufactures of Consumer Transportation and Utility

Industrial Goods Goods Companies
1. Pricing 1. Pricing 1. Customer service
2. Customer 2. Product research and 2. Public relations
Service 3. Sales development 3. Pricing
personnel 3. Sales personnel management 4. Sales personnel
management 4. Customer services management 5. Marketing cost
4. Product research 5. Marketing cost budgeting budgeting and control
5. Physical distribution and control

Because a price places a value on the overall combination of marketing variables offered to
consumers
(such as product feature image, customer service etc.) pricing decision must be made in
conjunction with product, distribution and promotion plans. Pricing decisions are viewed as
important by the economist, the accountant and the marketers.
As Viewed by an Economist: An economist views pricing as an important decision as it affects
the general level of demand in the market. According to him, price should be set at that level
where shortterm profit will be maximized. Short-terms profits will be maximized when marginal
revenue is equal to marginal cost. Marginal revenue is addition to total revenue by selling one
more unit of output and marginal cost is addition to total costs by producing one more unit of
output.
As Viewed by an Accountant: As against demand, an account focuses his attention on costs
while determining the price of product. He determines the price at a point where total costs of the
product are recovered and a reasonable level of profit is earned.
As Viewed by a Marketer: A marketer takes into account both the factor, demand and costs,
while pricing a product. While demand affected the upper limit of the prices, costs affect the lower
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limit. Pricing decision, thus, falls within a range where marketers have the flexibility of
determining different prices for the product. As an upper limit, prices should not exceed the value
of benefit that the product offer to the buyer and as a lower limit, it should not fall below the costs
of manufacturing and distributing the products.
Importance of Pricing
The importance of pricing as a marketing decision is stated by E. Raymond Corey in these words:
“Prices is a key element in an overall business strategy, and to make strategic pricing decisions
one should know what objectives are being served.” Significance of pricing in framing the overall
business strategy lies in the following important contributions made by the pricing decisions:
1. Catalyst for Marketing Mix: Pricing decision serves to act as a catalyst for integrating
the firm’s product, promotion and channel decisions. It largely determines the quality of a product,
the means of its promotion and the channel through which it will be transferred to consumer.
2. Profit Generator: Pricing helps firms in recovering the costs of production,
administration and distribution along with generation of additional funds, termed as profit to
enable the companies meet their short-run and long run objective.
3. Value Creator for the Customer: Price is what the consumer pays for the product along
with the bundle of benefits or services that it offers. It reflects and enhances the value of products
as perceived by the consumer.
4. Helps in Marketing Mix Flexibility: Unlike other elements of the marketing mix, pricing
decisions are flexible and can be easily changed according to market condition, product
variability, general economic condition, government regulations etc.
5. Works as Competitive Advantage to the Firm: Firms which are able to price their
products at a level where the final package offered to the consumer fulfils his requirement and to
able to stand the market competition. Pricing, thus, helps firms capture a bigger market share by
gaining an edge over their competitors.
6. Regulator of the General Economic Activity: Production, distribution and consumption
of various goods and services is governed by pricing. It reflects the production and consumption
level of an economy and generation of resources (through sales revenue) for payment to various
factors of production.
7. Optimum Allocation of National Resources is Ensured: Firms whose products are not
adequately priced will not be accepted by the society and will, therefore, have to leave the market.
Remaining firms can optimize the use of scarce national resources to produce the products at
minimum cost and sell them at reasonable prices to the consumers. Pricing thus, not only helps in
the optimum allocation of resources but also in maximisation of social welfare.

8.6 Factors Affecting Pricing Decisions

Before a firm develops the pricing strategy, it should take into consideration the different factors
which affect price decisions. For appropriate pricing decisions, the marketer has to know his
firm’s cost function and the influence of external environmental variables like competitor reaction
and government policy, besides knowing how demand varies across different price level. While
customer demand and the firm’s cost functions serve to provide the boundaries of price decision,

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environmental forces tend to have an upward or downward moving effect on the prices. For
example, absence of competition in the market has an effect of pushing up product price. On the
other hand, if the market is truly free, it encourages free competition, and then in an ideal
condition, price will decline. Likewise, higher government intervention in pricing through taxes
and duties will have and effect of pushing up prices. Thus, conceptually, a price decision
framework appears to be like the one shown in Figure 8.4.

Government Channel
policy members

Corporate Competition
objective
Price
Social and ethical
Promotion
consideration

Demand Costs

Figure 8.4 : Price Decision Framework

I. Consumers
Company involved with pricing decision must understand the relationship between price and
consumer purchases and perceptions. This relationship is explained by two economic principles-
the law of demand and the price elasticity of demand- and market segmentation.
The law of demand state that consumer usually purchase more units at a low price that at a high
price. The price elasticity of demand indicates the sensitivity of buyers to price change in terms of
the quantities they will purchase. Price elasticity represents the percentage change in the quantity
demanded relative to a specific percentage change in the price charged. This formula shows the
percentage change in the quantity demanded for each one percent change in price:

Quantity 1 – Quantity 2

Price elasticity = Quantity 1 + Quantity 2

Price 1 – Price 2
Price 1 + Price 2
Because the quantity demanded usually falls as price rise, elasticity is a negative number.
However, for purpose of simplicity, elasticity calculations are usually expressed as positive
number.
Elastic demand occurs if relatively small changes in price result in large change in quantity
demanded. Numerically, price elasticity is greater than 1. With elastic demand, total revenue goes
up when price are decreased and goes down when prices rise. Inelastic demand takes place if
price changes have little impact on the quantity demanded. Price elasticity is less than 1. With
inelastic demand, total revenue goes up when prices are raised and goes down when prices

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decline. Unitary demand exists if price changes are exactly by changes in the quantity demanded,
so total sales revenue remains constant. Price elasticity is 1.
Demand elasticity is based mostly on two criteria: availability of substitutes and urgency of need.
If people believe there are many similar goods or service from which to choose or have no
urgency to buy, demand is elastic and greatly influenced by price change.. Price increases will lead
to purchase of substitutes or delayed purchases, and decreases will expand sales as people are
drawn from competitor or move up the date of their purchases.
In consumers believe a firm’s offering is unique or there is an urgency to buy, demand is inelastic
and little influenced by price changes: Neither price increases nor declines will have much impact
on demand. Brand loyalty also generates inelastic demand, consumers then feel their brands are
distinctive and do not accept substitutes. Finally, emergency conditions increase demand
inelasticity. Figure 8.5 illustrates elastic and inelastic demand.

Case A Case B
P0 P0

P1 P1
D
D

Q0 Q0 Q0 Q1
Quantity Quantity
Figure 8.5 : Price Elasticity of Demand

Analysis of Figure 8.5: In case A the decline in price from P 0 to P1 leads to a large increase in
quantity demanded (Q0 to Q1). In case B, the decline in price from P 0 to P1 leads to a much smaller
increase in quantity demanded (Q0 to Q1). Demand in case A is much more elastic than in case B.

According to Evans, Price sensitivity varies by market segment because all people are not
equally price-conscious. Consumer can be divided into such segment as these:

• Price Shoppers: They are interested in the “best deal” for a product.
• Brand-loyal Customers: They believe their current brands are better than others and will
pay “fair” prices for those products.

• Status Seekers: They buy prestigious brands and product categories and will pay
whatever prices are set; higher price dignify greater status.

• Service/features Shoppers: They place a great value on customer service and product
feature and will pay for them.
• Convenience Shoppers: They value ease of shopping, nearby location, long hours by
sellers, and other approaches that make shopping simple, they will pay above-average
price.

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A firm must determine which segment or segments are represented by its target market and plan
accordingly.
II. Cost of the Product
Another major determinant, in fact the limit to pricing, is the firm’s cost structure. It is important
for marketers to estimate the costs of manufacturing and marketing the product. It is also
important to know how costs behave over a period of time and quantities produced. Price charged
must be such as will enable the manufacture to recover unit cost and earn a reasonable profit. If
the price of product falls short of the average total unit cost and thus result in a loss, no business
can continue for long. The cost itself will require appropriate adjustments to be made in price for
the different condition under which sales are to be made. Another factor to be considered is that
different firms, within the same industry, operate all different levels of efficiency, reflecting their
cost structures. Figure 8.6 shows this concept.

Costs Costs

Costs Costs

Time Quantity Produced

(A) Costs and Time (Learning Costs) (B) Cost and Quantity Produced

Figure 8.6
According to Rajan Saxena, in learning about the costs, the marketers should know the
following:

• Some costs do not change over production volumes. These are rents, salaries, depreciation,
plant and machinery cost (if acquired for the project), payment for utilities, R&D, and so
on.
These costs are called fixed costs or sunk costs.

• Some costs vary directly in proportion to the volume of the product produced or
manufactured.
These are raw material and wages and are called variable costs.

• Some costs are partly fixed and partly variable.

• There are some costs that remain fixed up to a certain level of operation and thereafter
change. These are called semi-fixed costs. A typical example is royalty payment for the use
of a brand name.

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 • The sum of the fixed and variable costs is called total cost. This is important because the
firm’ profitability is dependent on the correct estimation of these costs.
III. Competition
A firm must always keep an eye on the competitors’ prices while deciding its own. If there is some
flaw in price determination then the competitors can easily capture a major share in the market.
Depending upon various aspects of the product, the price can be kept either lower than that of the
competitors, equal to or higher than theirs. The existing economic conditions can influence a
firm’s pricing decision to a great extent, e.g. when the business is flourishing, the price can be kept
high. The opposite happens when the business is facing recession and the prices go down.
A market- controlled price environment is characterized by a high level of competition, similar
goods and services, and little control over prices by individual firms. Those trying to charge much
more than the going competitive price would attract few customers, because demand for any
single firm is weak enough, that customers would switch to competitor. There would similarly be
little gained by selling for less because competitors would match price cuts.s
A company-controlled price environment is characterized by moderate competition, well-
differentiated goods and services, and strong control over prices by individual firms, Companies
can succeed with above-average prices because people view their offerings as unique.
Differentiation may be based on brand image, features, associated services, assortment, or other
elements. Discounters also can carve out a niche in this environment by attracting consumers
interested in low prices. A firm’s choice of a price depends on its strategy and target market.
Table 8.2 illustrates the characteristics of various competitive structures in relation to the market
variable.
Table 8.2 Characteristics of Various Competitive Structures in Relation to The Market
Variable.

Market Pure competition Monopolistic Oligopoly Monopoly

Variables competition
Number of Very Many Many Few One
competitors
Size of Small Varies Large There are none
Competitor
Nature of Homogeneous Differentiated Homogeneous or Unique, no close
product differentiated substitutes
Seller’s control None Some, Come but be Complete (with
over price depends on careful in regulation)
degree of
differentiation
Entry into Very easy Easy Difficult Very difficult
industry

If a firm is the leader it can set a price and led the competition set its price level. But even the
leader firm has to anticipate a competitor firm’s reaction to a price change. Competition can react
by either following the leader or deciding to ignore it and retain or lower its price. Thus, in
deciding the price strategy, a marketer has to anticipate the competitor’s reaction. Because price

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strategies are rather easy and quick to copy, competitors reactions are predictable if the firm
initiating a price change is successful. Thus, marketing decision makers should view price from
both short-and long-run perspectives, Excessive competition may lead to lengthy and costly price
wars, in which various firms continually try to undercut each other’s price to draw customers.
These wars often result in low profits or even losses for the participants and in some companies
being forced out of business
IV. Channel Members
Each channel member seeks to play a significant role in setting prices in order to generate sales
volume, obtain adequate profit margins, derive a suitable image, ensure repeat purchases and meet
specific goals. A manufacture can gain greater control over price by using an exclusive distribution
system. A whole seller or retailer can gain stronger control over price by stressing its importance as a
customer to the manufacture. To maximize channel member cooperation regarding price decision, the
manufacture needs to consider four factor (a) channel member profit margins (b) price guarantees,
(c) special deals and (d) the impact of price increases.
V. Corporate Objectives
As we mentioned, in pricing objectives, an important issue to be decided by the top management
is their corporate objectives. These will reflect the philosophy of the owners or principal
shareholders and also their perception of the external environment. A firm may have alternative
objective such as a suitable return on the capital employed, maximization of sales, capturing
market from competitors, etc. Against this background one has to decide while framing a price
policy.
VI. Level of Promotion
The extent to which the product is promoted by the producer or middlemen and the methods used
are added considerations in pricing. If major promotional responsibility is placed on retailer, they
ordinarily will be charged a lower price for a product than if the producer advertises it heavily.
Even when a producer promotes heavily, it may want retailers to use local advertising to tie in
with national advertising. Such a decision must be reflected in the producer’s price to retailers.
VII. Social and Ethical Consideration
(a) Public Policy: Sometime the government may announce a general policy about
pricing of goods. Under these circumstances the sales manager has little or no control over
the prices and he has to fall in line with the public policy.
(b) Reasonable Price: It is a business ethics to charge reasonable and just price for
products. Though the rules of ‘what the traffic will bear’ and ‘what competition will allow’
have been popular, the principal of reasonableness has also guided the prices.
(c) Consumer’s Reactions to Rising Price: It should also be taken into account while
making pricing decision.
VIII. Government Policy
A Government controlled price environment is characterized by price being set or strongly
influenced by some level of government interventions. Examples are public utilities, mass transit,
insurance, and state universities. In each case, government bodies determine or affect price after
obtaining input from the relevant companies, institutions, and/or trade association, as well as other
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interested parties (such as consumer groups). Entry and exit barriers in the industry not only affect
firm’s price but also that of its competitors High barriers always encourage inefficiency, high
costs, and high price. Thus, a price decision is complex and a marketer need to be wary of all the
influences on his decision.

8.7 Principles of Effective Pricing Decisions

• Decide which pricing objectives are to be achieved.

• Anticipate potential pricing problems.
• Constantly monitor the company’s pricing program
• Establish price after determining costs, competitive prices and demand.
• Realize that product, place, and promotion decisions also affect pricing.
• Determine the elasticity of a product’s demand curve
• Determine the extent to which products have achieved distinctiveness in market place.
• Anticipate possible government action.
• Follow a step by step procedure for establishing prices.

8.7 Summary

Price is one of the most important variables in the marketing mix. Its importance has increased
substantially over the years because of environment factor like recession, intensity of inter-firm
rivalry, and the customer becoming more aware of alternatives. In our economy, price influence
the allocation of resources. In individual companies, price is one significant factor in achieving
marketing success. And in many purchase situations, price can be of great importance to
consumers. A price resents the value of a product for both the seller and the buyer. Price planning
is systematic decision making relating to all aspect of pricing by a firm: it involves both tangible
and intangible factor, purchase terms, and the non monetary exchange of goods and service.
Exchange does not take place unless the buyer and seller agree on a price, which represents an
equitable value.
Before setting a product’s base price, management should identify its pricing objective. Major
pricing objective are to profit based pricing objectives, sales-oriented pricing objectives, status quo
pricing objectives. Under price completion, seller influence demand primarily via change in price
levels: they move consumers along a demand curve by raising or lowering price. With non price
competition, seller downplay price and emphasize such other marketing attributes as image, packing,
and features; they shift the demand curves of consumer by stressing product distinctiveness.
During the last three decade, price decisions have become more important to business executives.
Price is the catalyst for marketing mix, profit generator; value creator for the customer, helps in
marketing mix flexibility, works as competitive advantage to the firm, regulator of the general
economic activity, and provides optimum allocation of national resources. Price decision must be

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made in conjunction with other marketingmix element. And pricing is often related to the product
life cycle, customer service level, and other specific marketing and company variable.
Before a firm develops the pricing strategy, it should take into consideration the different factors
which affect price decisions. For appropriate pricing decisions, the marketer has to know his
firm’s cost function and the influence of external environmental variables like competitor reaction
and government policy, besides knowing how demand varies across different price level. While
customer demand and the firm’s cost functions serve to provide the boundaries of price decision,
environmental forces tend to have an upward or downward moving effect on the prices. Likewise,
higher government intervention in pricing through taxes and duties will have and effect of pushing
up prices.

8.8 Self Assessment Questions

1. What do you mean by pricing? Discuss its various objectives.

2. What is pricing decision? Discuss the importance of pricing decisions in a firm?

3. What are the various factures influencing pricing decisions of a business firm? Discuss the
significance of pricing decisions?

4. Write short notes on:

(i) Non price competition
(ii) Principles of effective pricing decisions.

5. “Pricing must take into account economic concepts that are relevant as well as the trend of
economic and political thinking in a particular country.” Discuss.

6. Enumerate the factors which affect pricing decisions. What information is useful for
pricing decisions in a firm?

7. Differentiate between price and non price competition. What are their roles in marketing?

8.9 Reference Books

- Buell P. Victor (1985), “Marketing Management: A Strategic Planning Approach”,

International edition, McGraw-Hill Book Company, New York

- Stanton J. William (1987), “Fundamentals of Marketing”, Eighth edition, McGraw-Hill

International Edition, New York

- Evans R. Joel, Berman Barry (1995), “Principles of Marketing”, Prentice Hall,

Englewood Cliffs, New Jersey

- Monga G.S., Anand Shalini (2003), “Marketing Management”, Deep and Deep
Publications Pvt. Ltd., New Delhi

- Kumar Arun, Sharma Rachana (1998), “Marketing Management”, Atlantic Publishers and
Distributers, New Delhi
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- Saxena Rajan (2006), “Marketing Management”, Third edition, Tata McGraw–Hill
Publishing Company Limited, New Delhi

- Agarwal P.K. (2010), “Marketing Management – An Indian Perspective”, Eighth Edition,

Pragati Prakashan, Meerut

- Vasishth Neeru (2008), “Business Organization”, Taxmann Allied Services (P.) Ltd., New
Delhi

Unit - 9 : Pricing Methods and Strategies

Structure of Unit:

9.0 Objectives
9.1 Introduction
9.2 Price Determination Process
9.3 Types of Price Strategies
9.4 Resale Price Maintenance (RPM)
9.5 Summary
9.6 Self Assessment Questions
9.7 Reference Books

9.0 Objectives

After completing this unit, you will be able to:

• Present the overall process for developing and applying a pricing strategy.
• Understand the price determination process and various methods and procedures used by
firms to select a suitable prices
• Understand various types of pricing strategies.
• Point out various pricing strategies for entering in a market,
• Understand market skimming and market penetration strategies.
• Explain price discounts and allowances.
• Know about the various geographic pricing strategies.

9.1 Introduction

Pricing policies represents the general framework within which pricing decisions are taken. It
provides guidelines to carryout pricing strategy. According to Converse, “Decisions concerning
price to be followed for a period of time may be called price policies.”

Management utilizes price policies to guide itself in marking pricing decision over long period.
Pricing strategies are the pricing decisions management makes to fit the changing competitive
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situation. Thus, while polices are general and long range, pricing strategies are specific and for
shorter period. In the formulation if pricing strategy, its selling price is a key element.

As shown in figure 9.1, there are five steps in developing and applying a pricing strategy:
objective, broad price policy, price strategy, implementation, and adjustment. All of them are
affected by the outside factors (already described in previous unit).

Like any planning activity, a pricing strategy beings with a clear statement of goals and ends with
an adaptive or corrective mechanism. The development of a pricing strategy is not a one-time
occurrence. It needs to be reviewed when a new product is introduced, an existing produce is
revised, the competitive environment changes, a product moves through its life cycle, a competitor
initiates a price change, costs rise or fall , the firm’s price come under government scrutiny, and
other event take place.
Tff

Objectives
Consumers

Broad price
policy
Cost

Price
strategy
Government

Implementation
of price strategy
Channel member

Price
adjustments

Competition

Figure 9.1 : A Framework for Developing and Applying a Pricing Strategy

9.2 Price Determination Process

Pricing of product is a complex problem. It is a twilight zone between business interests and
public good. A firm has to reconcile both these objectives. There cannot be a model process for
pricing the products of each firm. The following steps can be described as the gradual steps in this
process:

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 1. Indentifying and Segmenting the Market
2. Setting the Price Objectives
3. Estimating Demand
4. Estimating Cost
5. Anticipation of Competition
6. Selecting Suitable Pricing Method to Select the Final Price
1. Identifying and Segmenting the Market
The first step in the fixation process is identifying the appropriate markets for the product. The
market profiles can, to a great extent, help the decision-makers in fixing price. The type of people
and their buying behavior influence the price fixation process a great extent. Secondly, the
markets are divided into homogenous groups or segments wherein the people entrusted with the
task of dealing with them become more specific about particular segments. The prices are fixed
for each segment according to the inclination of the people in the segment.
2. Setting the Price Objective
The marketer has to decide what it wants to accomplish. Before setting a product’s base price,
management should identify its pricing objective. Major pricing objective are to profit based
pricing objectives, salesoriented pricing objectives, status quo pricing objectives. (Detail
description is given in unit no. 8 (sub point no.8.3))
3. Estimating Demand
The next thing in the fixation of prices is the estimation of demand where the decision-marker
want to know what the future has in store for the firm as far as price are concerned. If the
consumers are eagerly waiting for something of the sort that is going to be offered, there is a
possibility that the demand will be inelastic; then, the price can be kept high. If the firm expects a
low frequency of product purchase then the price can be kept low.
4. Estimating Cost
Cost is one of the most important factors in setting the price. The company wants to charge a price
that covers all types of cost associated with the product. In determining the cost of producing and
distribution a product, therefore, it is important to distinguish between two basically different
types of costs:
Various Kinds of Cost

• A fixed cost, such as rent, executive salaries, remains constant regarding of how many
items are produced. Such a cost continues even if production stops completely. It is called
a fixed cost because it is difficult to change in the short run (but not in the long run.)

• Total fixed cost is the sum of all fixed costs.

• Average fixed cost is the total fixed cost divided by the number of units produced.
• A variable cost, such as labor or material, is directly related to production. Variable costs
can be controlled in the short run simply by changing the level of production. When
production stops, for example, all variable production costs become zero.

• Total variable cost is the sum of all variable costs. The more units produced, the higher
this cost is.
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 • Average variable cost is the total variable cost divided by the number of units produced.
• Total Cost is the sum of total fixed and total variable cost for a specific quantity produce.
• Average total cost is total cost divided by the number of units produced.
• Marginal cost is the cost of producing and selling one more unit. Usually the marginal
cost of the last unit is the same as that unit’s variable cost.
5. Anticipation of Competition
The next step is anticipation of competition which is a crucial factor in price determination. Sellers
do not operate in a vacuum. If the area of operation is easy and entry of new producer into the market
is easier, profit prospect are immense. It is quite obvious that the threat of competition is
considerable.
6. Selecting Suitable Pricing Method to Select the Final Price
Whatever the pricing objective or pricing policy, the company has to select a particular method
according to which its products will be priced. The pricing methods that help a company in fixing
its prices are as follows.
A. Cost Based Pricing
(a) Cost plus Pricing
(b) Mark up Pricing
(c) Target Pricing
(d) Marginal Cost Pricing
(e) Break-Even Pricing
B. Demand Based Pricing
C. Methods Based on Buyer
(a) Perceived Value Pricing
D. Competition Based Pricing
(a) Going Rate Pricing
(b) Sealed Bid Pricing
A. Cost Based Pricing
In cost-based pricing, a firm sets prices by computing merchandise, service, and overhead costs
and then adding an amount to cover its profit goal. In the following subsection, five cost-based
pricing techniques are covered:
(a) Cost plus Pricing: For cost-plus pricing, prices are set by adding a pre-determined
profit to costs. It is the simplest form of cost-based pricing. This method assumes that no
product is sold at a loss since the price cover the full cost incurred. Costs furnish a good
point from which the computation of price could begin. Under this method, fixing a
tentative price is easier. But this policy ignores the influences of competition and market
demand.

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Cost-plus pricing of often used by retail traders and in manufacturing industries, where the
production is not standardized. This method of pricing is based on simple arithmetic
adding a fixed percentage to the unit cost. The retail price of a particular item might be the
manufacture’s cost with the addition of his gross margin, the wholesaler’s gross margin
and the retailer’s gross margin. Therefore, this method is also known as the Sum of
Margins method.
Generally, the steps for computing cost-plus prices are to estimate the number of units to
be produced, calculate fixed and variable costs, and add a desired profit to costs. The
formula for cost-plus pricing is
Totalfixedcosts  Totalvariablecost  Projecte dprofit
Price 
Unitproduced
Total fixed costs + Total variable cost + Projected profit
Price =
Unit produced

Illustration: A custom-sofa manufacture has total fixed costs of 50,000, variable costs of
500 per sofa, desires 10,000 in profit, and plans to produce 100 couches. What is the
selling price for each couch?

Fixed costs + Total variable cost + Projected profit

Price =
Unit produced

50,000 + 500(100) +10,000

= = 1,100
100
Benefits of Cost plus Pricing: This method of pricing offers the following benefits:
• As price is not related to demand, it is not required to be frequently changed
according to changing demand.
• Cost-plus pricing is most effective when price fluctuations have little influence on
sales and when a firm is able to control prices.
• It is simple method of pricing. It attempts to cover all costs associated with a
product and ensures a specified level of profit also.
• It does not attract competition based on price as all sellers selling the same product
will calculate their selling price at the same margin of profit.
• Cost-plus pricing often allows firms to get consumer order, produce items, and
them derive prices after total costs are known. This protect seller.
• It is a fair method of pricing for both sellers any buyers. Seller does not take
advantage of buyers in case of an increase in demand.
Limitations of Cost plus Pricing: The method of pricing suffers from the following
limitations:

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• This method of pricing is suitable if the required amount of sales volume is
forthcoming. If pricing based on current demand, competition and buyer’s perceived value
about the products happens to be lower than this method of pricing, the desired sales
volume may not be achieved.
• Profit is not expressed in relation to sales but in relation to costs, and price is not
tied to consumer demand.
• Adjustments for rising costs are poorly conceived, and there are no plans for using
excess capacity. There is little incentive to improve efficiency to hold down costs, and
marginal costs are rarely analyzed.
• If initial costs are high, products will also be priced high. High prices products may
not be able to withstand competition if the already establishes firms are selling their
products at a low price. This may force the firms to reduce their prices to earn a lower rate
of return or sell at even below the costs for a short period of time to make the consumer
accept their product.
(b) Mark up Pricing: In this method, the marketer estimates the total of producing of
manufacturing a product and then adds a mark up or the margin that the firm wants. This is
indeed the most elementary pricing method and many services and products are priced
accordingly. To arrive at the mark up, one can use the following formula

Product cost
Price =
(100 – Markup per cent)/100

There are several reasons why markups are commonly stated in terms of selling price
instead of cost. One, because expanses, markdowns, and profit are computed.
* Markup can be calculated by transposing the formula above into

Price – Product cost Markup percentage = X 100

Price
Illustration: Following are the cost and expect sales

Variable cost = Rs. 20

Fixed cost = Rs, 3,00,000
Expected units sales = 50,000 units
Manufacture wants to earn a 30% return (mark up) on sales.
Solution :

Fixed cost
Unit cost = Variable cost +
Units sales

3,00,000
= 20 + 50,000 = Rs. 26.
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 Unit cost
Mark up Price
(100- mark up %)/100

= 26 = Rs. 37.10
[100 – 30]/100

The marketer would charge Rs. 37.10 to earn a return of 30% on also.
This approach ensures that all costs are recovered and the firm makes a profit. Indeed it
satisfies the finance oriented executives, but this method ignores the fact that it is not
necessary that the firm is able to sell its entire merchandize at this price. It does not
consider customer’s value perception and also the competitor’s reaction. It may be a useful
method if everyone in the industry adopts it, for this can minimize price wars.
(c) Target Pricing: In target pricing; prices are set to provide a particular rate of return on
investment for a standard volume of production (the level of production a firm anticipates
achieving). For target pricing to operate properly, accompany must sell its entire standard
volume at specified prices. Target pricing is used by capital-intensive firms (like auto
marker).
Mathematically, a target price is computed as

Investment cost X Target return on investment (%)

Price =
Standard volume

+ Average total costs (at standard volume)

Illustration: A auto maker has just spent 160,000,000 for a new plant. It has a 25 per cent
target return on investment. Standard production volume for the year is 5.000 units.
Average total costs, excluding the new plant, are 14,000 for each car (at a production level
of 5,000 cars). What is the selling price to the company’s retail dealers?

Investment cost X Target return on investment (%)

Price =
Standard volume

+ Average total costs (at standard volume)

160,000,000 X .25
= + 14,000 = 22,000
5,000
Target pricing has following major shortcoming.

• It is not useful for firms with low capital investment; it will understate selling
price.

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 • Because prices are not keyed to demand, the entire standard volume may not be
sold at the target price.

• Production problems may hamper output and standard volume may no be attained.
• Price cuts to handle overstocked inventory are not planned under this approach.
• If the standard volume is reduced due to expected poor sales performance, the price
would be raised under a target-pricing calculation.
(d) Marginal Cost Pricing: To account for different forms of market structure and
product differentiation and intense competition, marginal cost pricing is a more suitable
form of pricing. If firms are not able to recover their costs along with a fair rates of return
(profits) they may have to decide between (i) selling below cost, or (ii) stop production at
all. At this juncture, they are guided by the principles of marginal costing. Marginal cost is
the cost of producing an additional unit of output, that is, addition to total costs of
producing one more unit of output. According to this method, firms should continue to sell
so long as marginal revenue exceeds the marginal costs. This is illustrated in the following
figure 9.2:

Marginal Cost

Average Cost

ts
oC
/e P Marginal Revenue
irc
P

Output .
a
Figure 9.2 : Pricing in a Perfect Competition Market
Analysis of figure 9.2: Prices are set at a level where marginal revenue is equal to
marginal cost. In this figure the marginal cost equal marginal revenue at output ‘a’ and the
price required to sell this level of output is ‘p’
[e] Break Even Pricing: Under this method the firm first determines to breakeven point
i.e. the volume which is required to sell at least to reach to the no profit no loss situation.
Target pricing uses the concept of break even chart. A break even chart shows the total cost
and total revenue expected at different sales volumes levels. Break-even point or volume is
the volume at which total cost is equal to total revenue. This represents a situation of no
profit-no loss. It is calculated by using the following formula.

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 Fixed cost
Break even point = Selling price- Various
cost (Contribution)

Illustration:
Fixed cost = Rs.2,00,000 Selling price per unit = Rs.20
Variable cost per unit = Rs.10, Contribution (SP-VC) = Rs.10
Break even point, therefore, is Rs.2,00,000

[20-10]
= 20,000 units

If the company wants to earn profit, it must sell more than 20,000 units of output at Rs. 10 each.
Firms will prepare an estimate of demand at different price levels and develop a break
even chart showing total revenue, total costs and profits across a range of production
volumes. Higher price will steepen the total revenue curve and lower the break-even
output. The firms will access different break-even points for different price level and adopt
a price level that will suit its pricing objection
A break-even chart showing the break-even output at two different price level is shown below:

Option I Option II
Fixed Cost Rs. 1,00,000 1,00,000
Variable cost per unit Rs. 5 Rs. 5
Selling price per unit Rs. 10 Rs. 15
Contribution Rs. 5 Rs. 5

Break-even point 1,00,000 1,00,000

= 20,000 units =10,000 Units

5 10

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 Total revenue (Option II)

Total revenue (Option I)

eu sh 4
n k Total cost
ev a
e ln
R I
/ .s)
sot R
C ( 3
fit
fit Pro
Pro

2
s
Loss Los

1 Fixed cost

0
10 20 30 40 50
Sales/Output (’000 units)

Figure 9.3 : Break-even Chart

The break-even chart, thus, provides the following information:

• Profit or losses at different levels of output

• Break-even points at different levels of price
• Effect of change in costs on profits and break-even points
Though break-even analysis is an important financial tool that helps in determining the price
which will recover total costs associated with a given level of output, it is still an evaluative
approach rather than a prescriptive one as it is cost-based and not demand-based.
B. Demand Based Pricing
With demand-based pricing, a firm sets prices after studying consumer desires and ascertaining
the range of price acceptable to the target market. This approach is used by companies that believe
price is a key factor in consumer decision making. Demand-based techniques require consumer
research as to the quantities that will be purchased at various prices, sensitivity to price changes,
the existence of market segment, and consumers’ ability to pay. Demand estimates are usually less
precise than cost estimates. Also, firm that does inadequate cost analysis and rely on demand data
may end up losing money if they make unrealistically low cost assumptions.
Under demand-based pricing, very competitive situations may lead to small markups and lower
prices because consumer will purchase substitutes. In these cases, costs must be held down or
prices will be too-high- as might occur via cost-based pricing. For noncompetitive situation, firms
can set large markups and high price since demand is rather inelastic. There would be less
emphasis on costs when setting prices in these situations. With cost-based pricing, firms would be
apt to set overly low price in noncompetitive markets.
C. Method Based on Buyer
This method of pricing is based upon buyer’s perception about the value of the product, that is,
what importance does the product

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 (a) Perceived Value Pricing: Perceived value pricing is based on the concept of setting
the price on the basis of value perceived by the buyer of the product, rather than the
seller’s cost. The marketer uses the non price variable in the marketing mix to build up
perceived value in the buyer’s mind. Price is set to match the perceived value of the
product. If the seller charges more than the buyer’s perceived value then the marketer’s
sales would suffer. In cost- based pricing, seller first determination the cost of the product
and then fix its price. In value-based pricing, prices are, based on not what seller wish to
sell at but on what buyers are willing to pay for.
The cost-based and the value-based methods can be depicted in figure 9.4 as follow:

Product Cost Price Value

Customers
Cost-based pricing

Customers Value Price

Product Cost
Value-based pricing
Figure 9.4 : Cost and Value based Pricing

Source: Thomas J. Nagle and Read K. Holden; The Strategy and Tactics of pricing, 2nd
edition Combining the cost and the value –based pricing method, one can draw the following
conclusion that the upper line of the price of a product is determined by demand, that is, what
the consumer determine as the perceived value of the product. The lower limit, on the other
hand, is the cost of producing and distribution the product. While the seller cannot charge
more than the consumers value the product at, they cannot charge less than what it cost to
them.
D. Competition Based Pricing
In competition-based pricing, a firm uses competitor’s prices rather than demand or cost
considerations as its primary pricing guideposts. The company may not respond to changes in
demand or costs unless they also have an effect on competitor price. A firm can set price below the
market, at the market, or above the market, depending on its customer, image, marketing mix,
consumer loyalty, and other factors. This approach is applied by firms that contend with other
selling similar items.
Competition-based pricing is popular. It is simple, with no reliance on demand curves, price
elasticity or costs per unit. The ongoing market price level is assumed to be fair for both consumer
and companies. Pricing at the market level does not disrupt competition and, therefore, does not
lead to retaliations. However, it may lead to complacency; and different firms may not have the
same demand and cost structure. Two aspect of competition-based pricing are discussed in the
following subsection:
(a) Going Rate Pricing: Which the above methods are cost oriented, this a method
which is competition oriented. In this method, the firm prices its product at the same level
as that of the competition. This method assumes that there will be no price war within the
industry. This is a method commonly used in an oligopolistic market. Despite its advantage
of preventing price wars, the method suffers from serious limitation. The first is that it is
not necessary true that all firms or the leader firm is operating efficiently. In case it is not,
it will mean that the follower firm will also adopt a price level which reflects the leader’s
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 inefficiency rather its own efficient. Beside, it is not always true that a decision taken in
collective wisdom is the best. It may certainly not be so from the customer’s point of view.
(b) Sealed Bid Pricing: In this, two or more firms independently submit price to a
customer for a specify good, project, and/or service. Sealed bids may be requested by
some government or organization consumer; each seller then has one chance to make its
best offer. The price quoted reflects the firm’s cost and its understanding of competition. If
the firm was to price its offer only at its cost level, it may be the lowest bidder and may
even get the contract but may not make any profit out of the deal. So, it is important that
the firm uses expected profits at different price level to arrive at the most profitable price.
This can be arrived at by considering the profits and profitability of getting a contract at
different prices. Although a firm’s potential profit (loss) at a given bid amount can usually
be estimated accurately, the probability of getting a contract (underbidding all other
qualified competitors) can be hard to determine

9.3 Types of Price Strategies

Price policies usually lead to administered prices- consciously set price. In other words, instead of
letting daily market forces decide price, most firms set their own prices. Some firm do their
pricing without much thought- just “meeting competition.” They act as if they have no choice.
Managers do have many choices. They should administer their prices. And they should do it
carefully. If customers won’t pay the price- the whole marketing mix fails. Keeping in view the
objectives of the pricing policy, some of the pricing strategies that are adopted by business
concerns are as follows.
A. Geographical Pricing
B. Discount Pricing
C. Segmented Pricing
D. Promotional Pricing
E. Psychological Pricing
F. Product Mix Pricing
G. Market Entry Pricing Strategies
H. Follow the Leader Strategies
I. One Price Policy vs. Flexible Pricing
A. Geographical Pricing
Sellers selling in different geographical locations throughout the county will price their products at
different prices. Goods selling in local markets will be priced lesser than the goods which are sold
in others states. This is because of the freight and transportation charges. A company must decide
how to price its products to consumers in different parts of the country. Often geographical pricing
is not negotiated but depend upon the traditional practices in the industry in which the firm
operates, and all companies in that industry normally confirm to the same pricing format.
Following are the common method of Geographical Pricing.
(a) F.O.B. Point of Production Pricing: In one widely used geographic pricing system,
the seller quotes the selling price at the factory or other point of production and the buyer

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 pays the entire cost of transportation. This is usually referred to as f.o.b. mill of f.o.b.
factory pricing. Of the four methods discussed in this section, this is the only one in which
the seller does not pay any of the freight costs. The seller pays the costs of loading the
shipment aboard the carrier –hence the term “f.o.b.” or “free on board”. The title to the
merchandise passed to the buyer at that point, and he assumes all costs and responsibilities
for shipping
(B) Uniform Delivered Pricing/ Zone Pricing: The Company charges the same price
plus freight to all the customers regardless of their location. The freight charges set at the
average freight cost. Here the seller pays for the freight. It is a kind of zone pricing. The
whole market is considered as one zone-and the price including the average cost of
delivery. It is most often used when (1) transporting costs are relatively low and (2) the
seller wants to sell in all geographic areas at one price- perhaps a nationally advertised
price. Zone pricing means making an average freight charges to all buyers within specific
geographic areas. The seller pays the actual transportation charges and bills each customer
for an average charge. A firm might divide the State into various zones, for example. All
customers in the same zone pay the same amount for freight even thought shipping costs
may vary. Zone pricing reduce the wide variation in delivered prices that result from an F.O.B.
shipping point pricing policy.

(c) Basing Point Pricing: In this method seller selects a given city as a basing point
and charges all customer the freight cost from that city to the customer location regardless
of the city from which the good are actually shipped.
(d) Freight Absorption Pricing: A freight absorption price may be adopted to offset
some of the competitive disadvantage of f.o.b. factory pricing. With an f.o.b. factory price,
a firm is at a price disadvantage when it tries to sell to buyers located in markets nearer to
competitor plants. In order to penetrate more deeply into these markets, a seller may be
willing to absorb some of the freight costs. As a policy, freight absorption usually means
that seller A will quote to the customer a delivered price which is equal to A’s factor price
plus the freight costs which would be charged by the competitive seller located nearest the
customer.
Freight absorption is particularly adaptable to a firm whose fixed costs per unit of product
are high and whose variable costs are low. In these cases, management must constantly
seek ways to cover fixed costs, and freight absorption is one answer. The legality of freight
absorption is reasonably clear. The policy is legal if it is done independently and not in
collusion with other firms. Also it must be done only to meet competition.
B. Discount Pricing
It refers to selling at a price less than the list price to (i) deal with different classes of customers,
(ii) prompt them to make early payments, (iii) encourage them to buy in large volumes, and (iv)
encourage off season buying deductions from the list price is called as discount. Following are the
different types of discounts offered by the firms:
(a) Quantity Discounts: are discounts offered to encourage customers to buy in large
amount. This lets a seller get more of a buyer’s business, shifts some of the storing
function to the buyer, reduce shipping and selling costs-or all of these. These discounts are
of two kinds: cumulative and non-cumulative,

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Cumulative quantity discount apply to purchases over a given period such as a year-and
the discount usually increase as the amount of purchases increases. Cumulative discounts
are intended to encourage buying from one company by reducing the price for additional
purchases.
Non-cumulative quantity discounts apply only to individual order. Such discounts
encourage large orders but don’t tie a buyer to the seller after that one purchase.
Quantity discount can be a very useful marketing strategy variable for the marketing
manager. Some customers are eager to get them. But marketing manager must use quantity
discount carefully-offering them to all customers on equal terms-to avoid price
discrimination.
(b) Trade Discount: It refers to discount offered by manufacturer to channel members
(wholesaler, retailer etc) for smoothly carrying out the sales activities and providing the
important function of selling, storing and record keeping. A producer, for example, might
allow retailers a 30 percent trade discount from the suggested retail list price- to cover the
cost of the retailing function and their profit. Similarly, the producer might allow
wholesaler a chain discount of 30 percent and 10 percent off the suggested price. The
wholesaler then would be expected to pass the 30 percent discount on to retailers.
(c) Cash Discount: A cash discount is a deduction granted to buyers for paying their
bills within a specified time. The discount is computed on the net amount due after first
discounting trade and quantity discounts from the base price. Every cash discount includes
three elements,

• The percentage discount

• The period during which the discount may be taken.  The
time when the bill become overdue.
Cash discount is offered to customer for prompt payment of their bills. It increases sellers’
liquidity and reduces the possibility of bad debts.
(d) Seasonal Discount: If a firm producing an article, such as air conditioners or lawn
removers, which is purchased on a seasonal basis, management may want to consider the
strategy of granting a seasonal discount. This is a discount of say, 5, 10, or 20 percent
which is given to a customer who places an order during the slack season. Off season
orders enable the manufacture to make better use of his production facilities.
(e) Allowances: Allowances are the type of reductions form the list price. These are
of two types (a) Trade in allowances (b) Promotional allowances. Trade in allowances is
the price reductions given to the buyer for purchasing the new item and selling the old one
of the any brand to the company. These types of allowances are common in case of scooter,
cooker, refrigerators and mobiles.
Promotional allowance may be offered to wholesalers and/or retailers in exchange for
such things as local advertising, special displays or guaranteed shelf space. These may take
the form of a percentage reduction in price or as an outright cash payment either to the
channel member or to the promotional vehicle, e.g. a local newspaper.

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C. Segmented Pricing
It refers to selling the product at different prices where difference in price is not commensurate
with the difference in costs. Perhaps, difference in prices is more than the difference in their costs
resulting in additional profits for the firms. Segmented pricing can take different forms:
(a) Customer Segment Pricing: In this type different customer pay different price for
the same product or service e.g. students get concession for rail transport, bus transport etc.
MP gets the free rail journey.
(b) Production-form Segmentation: A product is brought out in different versions
and sold at different prices where price difference is more than the cost difference.
(c) Locating Pricing: Different locations are priced differently even though the cost
of offering each location is the same. For example in a cinema hall different locations are
differently priced.
(d) Time Segmentation: The same product sells at different price during different
timer of the year. An air conditioner that sells for Rs. 25,000 during summer season may
sell for Rs, 24,000 during winter season. This form of segmented pricing supports the
discount pricing where off season discounts are offered to keep the production line going.
D. Promotional Pricing:
In this type the marketer generally price their products below list price, Promotional pricing can
take any of the following forms:
(a) Special Event Pricing: Marketer here set special price for the special event like
Holi, Diwali, New year in the form the discounts.
(b) Low Interest Financing: Instead of lowering the price, the company can offer
customers low interest financing. It is very common for consumer durables especially two
wheelers. Low interest financing is very appealing to those customers who can not give the
whole price at one time.
(c) Warranties and Service Contract: Marketer can promote sale by offering
warranties or free services promise.
(d) Psychological Discounting: This involves putting the higher prices and then
cutting the price psychologically so that it can feel to the customers as if the price are
actually reduced e.g. to 249.
E. Psychological Pricing
Price carries a psychological feeling about the quality of the product in the buyer’s mind. High
prices generally symbolize high quality and, therefore, even if the goods worth Rs. 300 are sold
for Rs. 500, consumer’s will readily purchase them provided they are sold at an established and
reputed showroom. In this type the marketer attempts to influence buying decision by setting
prices that are emotionally pleasing to buyers. Psychological pricing is of following types:
(a) Prestige Pricing: It is based on the assumption that the Consumer does not buy
goods or service at prices they consider to be too low. Within a certain range the higher the
price, the greater the quantity demanded, but when price rises too high, the product is
considered overpriced and quantity demanded falls off. When price falls too low the
product is suspected of lacking quality.
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 (b) Odd Pricing: It is another psychological strategy commonly used in retailing. Odd
pricing sets prices at uneven (or odd) amounts, such as 499 or 1995 rather, than at even
amounts. Some seller believes in pricing that ends at an odd number. Though the
difference is only Rs 1, psychologically, buyers feel that they are paying in 400 and not
500s. Odd price may help consumer stay within their price limits and still buy the best
item available. A shopper willing to spend “less than 200” for a tie will be attracted to a
199 tie and might be a likely to purchase it as a 170 tie because it is within the defined
price range.
(c) Leader Pricing: With leader pricing, a firm advertises and sells key items in its
product assortment at less than their usual profit margins. For a wholesaler or retailer, the
goal is to increase customer traffic. For a manufacturer, the goal is to gain greater
consumer interest in its overall product line. In both cases, it is hopped that consumers will
buy regularly priced merchandise in addition to the specially priced items that attract them.
Leader pricing is most used with well-known, high-turnover, frequently bought products. It
is opposite of prestige pricing. Here the firm keeps the price lower than the normal price.
The objective is to gain greater consumer interest in its overall product line.
Leader pricing is most often used.
(d) Price Lining: Price lining involves selling products as a range of prices, with each
representing a distinct level of quality (or feature) Instead of setting one price for a single
version of a good or service , a firm sells two or more version (with different levels of
quality or features) at different prices. Price lining involves two decisions: prescribing the
price range (floor and ceiling) and setting specific price points in that range. While
developing a price line, the firm must consider the following factors:

• Price points must be kept far enough a part so that customers perceive quality
difference among different brands.

• The relationship among price point must be maintained when cost rises, so that
clear differences are retained.
Price lining has the advantage of offering an assortment of products, attract market
segments, reduce competition by carrying various lines throughout the price range and
increase overall sales volume.
F. Product Mix Pricing
Price is to be modified according to the product which is the part of the product mix. Here the firm
wants to increase the profitability on the total product mix. Pricing becomes difficult when the
various products have demand and cost interrelationship. There are six product mix pricing
situations.
(a) Product Line Pricing: When seller sell different varieties of the same product,
they resort to a pricing policy referred to as product line pricing. This policy is adopted
when different varieties of products have different feature with respect to their cost, speed,
size, design, customer valuation, competitor’ prices etc.
Maruti Ltd. For example, sells different models of Zen, Lx, Vx, Lxi, and Vxi. Each of
these models is priced differently because of different features or benefits that it offers to
the customers. Evan an increase in price will not dissuade the buyers from buying the
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 product of his choice provided the seller provides the quality that justifies the price
difference. If price difference of two models is greater than their cost difference, it will
also generate additional revenue and profit for the seller.
(b) Price Bundling: Some form of price bundling can be used in a strategy. With
bundled pricing, a firm sells a basic product, options, and customer service for one total
price. An industrial-equipment manufacture may have a single price for a drill press, its
delivery, its installation, and a service contract. Individual item, such as the drill press
would not be sold separately.
With unbundled pricing, a firm breaks down prices by individual components and allows
the consumer to decide what to purchase. A discount appliance store may have separate
price for a refrigerator, its delivery, its installation and a service contract.
(c) Optional Feature Pricing: Most firm offer optional/accessory products or features
along with their main product. The pricing strategy is to keep the price of the optional
product on the higher side comparatively
(d) Captive Pricing Strategy: Here a special price deal is offered to loyal customers
or to those who are regularly buying one of the products of the firm. A typical example is
the Gillette shaving system, which offers two twin blades, free with its razor to induce the
buyer to purchase its blades. As may be observed, this is a strategy aimed at building
customer loyalty.
(e) By Product Pricing: Processing of iron, petroleum and chemical products result in
by products which are of no use to the seller of the main product. He may, therefore, either
dispose them off as scrap and adjust the scrap value in the cost of the main product there
by reducing the overall cost and price of that product or sell it to consumer at a price that
the consumer value it at. The scrap value or the selling price should be more than the cost
of storing the by-products, otherwise it will be reflected in the selling price of the main
product.
(f) Two-part Pricing: This strategy is used by products that can be divided into two
distinct part. For example, membership of a video library has two parts-one is the
membership fee, which is annual, and the other is the rent for each time frame for which a
video cd is rented. As may be observed, the price has two components-the fixed fee and
the variable usage fee.
G. Market Entry Price Strategies
In preparing to enter the market with a new product, management must decide whether to adopt a
skimming or a penetration pricing strategy.
(a) Market Skimming: This strategy uses a very high introductory price to skim the
cream of demand at the very outset. Prices continue to be high till the competitor begins to
enter the field. As soon as competitor enters the market, the producer reduces the prices of
his product. This method helps in recovering the product development cost very soon. By
this strategy the marketer takes the cream before keen competition starts.
Cases of Attraction Price Skimming
• Beginning. In the beginning, there is lack of competition and, therefore, innovative
company can fix the monopolistic price of its product.
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 • Luxury Product. This policy is suitable for pricing the luxury products because it is
an index of social status with lesser prices sensitivity.
• Prompt Returns. It attracts the prompt return of investment.
• Highly Distinctive Price. This strategy tends to have more price in elastic demand at
first, then it will be reduced later on, because advertising and personal selling have
more influence on sales than price does during a product’s market pioneering stage
• Taping Insensitive Market. As high introductory price divides the market into
segments differing in their responsiveness to price. The skimming price taps the market
segment that is relatively insensitive to price. The company can reach more price
conscious market segment through later price reduction.
• Easy to Reduce. If an introductory price is too high, it is easy to reduce but if it is too
low it is difficult and awkward to raise.
• Greater Sales and Profits. A high introductory price often generates greater rupee
sales and profits than a low introductory price. Thus, price skimming provides funds
which the marketers, can use later in expanding sales to other market segments.
• Chance to Recoup Development Expenses. Price skimming gives the innovating
marketer a chance to recoup his product development expenses before competitors
with lower product development enter the market.
(b) Market Penetration Pricing: In market-penetration pricing, a relatively low price is
established for a new product. The price is low in relation to the target market’s range of
expected prices. The primary aim of this strategy is to penetrate the mass market
immediately and, in so doing, to generate substantial sales volume and a large market
share. At the same time, starting with a low price is intended to discourage other firms
from introducing competing products.

Price Low Medium High

PenetrationPrice PricingSkimming

Figure 9.5 : Three Basic New Product Introduction Pricing

Strategies

Market-penetration pricing makes the most sense under the following conditions:
• A large market exist for the product
• Demand is highly elastic, typically in the later stages of the life cycle for a product
category
• Substantial reductions in unit costs can be achieved through large-scale operations.
In other word, economies of scale are possible.
• Fierce competition already exists in the market for this product or can be expected
soon after the product is introduced.
(c) Meet the Competition Pricing: Meet the competition pricing means that the marketer
will enter the market with the new product priced the same or approximately the same as
those currently offered by competitors. If the marketer use this particular tactic, he must
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 then ask himself why any one would buy his product, which is both unfamiliar and
unproven in the market. If the customer is purchasing a product that satisfies the same
needs at the same price he have set, unless there is an additional advantage to his product,
there is no reason to do so. Therefore, a marketing manager choosing a tactic of meeting
the competition’s price must add something additional to increase the value of the new
product, otherwise consumers will not switch.
H. Follow the Leader Pricing
This pricing policy is normally followed in oligopolistic market situations which are characterized
by a few sellers. Small seller quickly responds to big firm’s marketing and pricing strategies. A
price cut by a big seller is followed by other also but a price rise is not followed by them. Big
firms may loss the market by a price rise but cannot attract more customers through a price cut.
Since small firms charge the same price as big ones do, this is called as “follow the leader” pricing
policy.
I. One Price Policy vs. Flexible Pricing
A one price policy lets a firm charge the same price to all customers seeking to purchase good or
service under similar condition. Prices may differ according to the quantity brought, time of
purchase, and service obtained (such as delivery and installation) but all consumer are given the
opportunity to pay the same price for the same combination of goods and services. Flexible pricing
allows a firm to charge prices based on the consumer’s ability to negotiate or on the buying power of
a larger customer. For instance, people who are knowledgeable or are good bargainers would pay
lower prices than those who are not knowledgeable or are weak bargainers.

9.4 Resale Price Maintenance (RPM)

The terms ‘resale price’ and ‘retail price’ are often used synonymously. But while resale price
maintenance is a policy adopted by a manufacture whereby he fixes a price for his product to be
sold to customers by retailers, retail price is that price at which a retailer sells the product to his
customers. Usually, the retailer sells his product on the basis of cost plus expenses, plus his margin
of profit. By reducing his own margin, a retailer is free to sell the product at any price he deems
fit. But resale price maintenance is an arrangement of a contract entered into between the supplier
and the reseller. (Wholesaler or retailers). This contract normally stipulates a condition that the
reseller will have to sell the product at a price fixed by the supplier. If the dealer does not maintain
the specified prices, the supplier will even withhold further supplies. Strict enforcement of the
suggested price is possible only when a manufacturer uses a selective or exclusive distribution
system. The particular brand should have achieved a high degree of customer acceptance and
popularity, in order to maintain resale price.
Benefits of RPM: It offers the following benefits:

• It prevents small firms (retailers) from facing the threat of price cutting by large firm.
• It allows consumers to buy the product at uniform prices from any sale outlet. They are,
thus saved of the botheration of bargaining.
• It helps in maintaining the price of the seller’s product as it cannot be sold below a
minimum standard price.

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 • It allows for recovery of costs by the seller along with a reasonable rate of markup.
• It helps in protecting the brand image of the product as the reseller cannot sell the
competing brand.  It helps producers maintain control over service levels provided by
resellers to the consumers.
Drawback of RPM: This pricing policy suffers form the following drawbacks:

• It does not distinguish between efficient and inefficient dealers as both of them get same
price for the products sold. Efficient dealers are not rewarded for the services provide by
them to the consumers.
• Consumers are the benefited party of pries-competition. Since RPM avoids price cutting
amongst sellers, consumer often have to pay high price for the products; in case of sale of
branded product though, they do not wish to buy products which do not compete on
account of price.

9.5 Summary

After deciding on pricing goals and setting the base (or list) price, marketers must establish
pricing strategies that are compatible with the rest of the marketing mix. Pricing policies
represents the general framework within which pricing decisions are taken. It provides guidelines
to carryout pricing strategy. Management utilizes price policies to guide itself in marking pricing
decision over long period. Pricing strategies are the pricing decisions management makes to fit the
changing competitive situation. There are five steps in developing and applying a pricing strategy:
objective, broad price policy, price strategy, implementation, and adjustment. All of them are
affected by the outside factors.
Pricing of product is a complex problem. It is a twilight zone between business interests and
public good. There cannot be a model process for pricing the products of each firm. The following
steps can be described as the gradual steps in this process:
1. Indentifying and Segmenting the Market
2. Setting the Price Objectives
3. Estimating Demand
4. Estimating Cost
5. Anticipation of Competition
6. Selecting Suitable Pricing Method to Select the Final Price
Whatever the pricing objective or pricing policy, the company has to select a particular method
according to which its products will be priced. The pricing methods that help a company in fixing
its prices are cost based pricing, demand based pricing, methods based on buyer, and competition
based pricing. These three pricing approaches should be integrated via combination pricing, so
that a firm includes all necessary factor in its pricing strategy. Otherwise, critical decisions are
likely to be overlooked.
Price policies usually lead to administered prices- consciously set price. In other words, instead of
letting daily market forces decide price, most firms set their own prices. Some firm do their
pricing without much thought- just “meeting competition.” They act as if they have no choice.
Managers do have many choices. They should administer their prices. And they should do it
carefully. If customers won’t pay the price- the whole marketing mix fails. Keeping in view the
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objectives of the pricing policy, some of the pricing strategies that are adopted by business
concerns are as follows.

A. Geographical Pricing
B. Discount Pricing
C. Segmented Pricing
D. Promotional Pricing
E. Psychological Pricing
F. Product Mix Pricing
G. Market Entry Pricing Strategies
H. Follow the Leader Strategies
I. On Price Policy vs. Flexible Pricing
When a firm is launching a new product, it must choose a market-skimming or a market
penetration pricing strategy. Market skimming uses a relatively high initial price, market
penetration a low one.
Resale price maintenance is an arrangement of a contract entered into between the supplier and the
reseller. (Wholesaler or retailers). This contract normally stipulates a condition that the reseller
will have to sell the product at a price fixed by the supplier. If the dealer does not maintain the
specified prices, the supplier will even withhold further supplies. Strict enforcement of the
suggested price is possible only when a manufacturer uses a selective or exclusive distribution
system. The particular brand should have achieved a high degree of customer acceptance and
popularity, in order to maintain resale price. Some approaches to resale price maintenance are
more effective than other moreover, some methods may be illegal.
9.6 Self Assessment Questions
1. Discuss the basic methods of pricing used by firms in our country.

2. Discuss the price determination process adopted by the marketing managers.

Explain the method of cost plus pricing with example. What are its benefits and
3.
limitations?
4. Write short notes on:
(a) Market Skimming Pricing
(b) Market Penetration Pricing
(c) Segmented Pricing
5. Differentiate between “Skimming” and “Penetration.”
6. Explain in brief the basic pricing strategies which can be followed to determine the price
of a product

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7. Distinguish between.
(a) Cost based pricing
(b) Demand based pricing
(c) Competition based pricing
8. Resale price maintenance is disadvantage to the consumer? Do you agree? Explain.
9. Enumerate briefly the steps of price determination process.

10. What is resale price maintenance? What are its benefits and limitations?

9.7 Reference Books

- Buell P. Victor (1985), “Marketing Management: A Strategic Planning Approach”,
International edition, McGraw-Hill Book Company, New York
- Stanton J. William (1987), “Fundamentals of Marketing”, Eighth edition, McGraw-Hill
International Edition, New York

- Evans R. Joel, Berman Barry (1995), “Principles of Marketing”, Prentice Hall,

Englewood Cliffs, New Jersey

- Monga G.S., Anand Shalini (2003), “Marketing Management”, Deep and Deep
Publications Pvt. Ltd., New Delhi

- Kumar Arun, Sharma Rachana (1998), “Marketing Management”, Atlantic Publishers and
Distributers, New Delhi

- Saxena Rajan (2006), “Marketing Management”, Third edition, Tata McGraw–Hill

Publishing Company Limited, New Delhi

- Agarwal P.K. (2010), “Marketing Management – An Indian Perspective”, Eighth Edition,

Pragati Prakashan, Meerut

- Vasishth Neeru (2008), “Business Organization”, Taxmann Allied Services (P.) Ltd., New
Delhi

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 Unit - 10 : Distribution Channels

Structure of Unit:

10.0 Objectives
10.1 Channels of Distribution: An Introduction
10.2 Types of Intermediaries/ Channels
10.3 The Importance of Channels
10.4 Channel Development
10.5 The Role of Marketing Channels: Channels Functions
10.6 Channel Flows
10.7 Channel Levels
10.8 Channel Design Decisions and Channel Selection
10.9 Summary
10.10 Self Assessment Questions
10.11 Reference Books

10.0 Objectives

After completing this unit you will be able to:

• To understand the basic concepts of the channels and the channel categories;
• To understand the importance of the varied channel types, along with their levels and
flows;
• To evaluate the functions and importance of the various types of the channel types;
• To determine the process of the channel design decisions;  To evaluate the various
channel design stages.

10.1 Channels of Distribution: An Introduction

Most of the producers do not sell their product directly to their end-users. But it involves the entire
assistance and the effective and efficient channel distribution, the value chain of the marketing
process. Moreover, marketing involves process creations, which is also facilitated by the value
creation. The emerging holistic marketers are increasingly forming the value network, and thereby
the whole of the supply chain that links the raw materials, components, and manufactured goods
to the final consumers, through the various intermediaries.

The intermediaries or the channels of distribution refers to those links that bridges the gap
between the manufacturers and the consumers, and thereby, enable the availing of the produces to
the targeted market. The channels, also called as the middleman, are thus, the set of the
interdependent organizations performing variety of functions, involved in making the product or
service available for use or consumption. While the ‘Channels of Distribution’ or the ‘Trade

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Channels’ refer to the entire flow, the movement of the goods from the manufacturer to the
consumers, consisting of the various intermediaries Distribution’ or the ‘Trade Channels’. They
can be also called as the pathways to be followed by the products or the services after production,
culminating in purchase and use by the final end user. The companies in the present dynamic
market must build and manage a continuously evolving and increasingly complex channel system
and value network.

10.2 Types of Intermediaries/ Channels

Intermediaries or the channels can be broadly categorized on the criteria of the ownership rights
and the possession of the goods, in three categories, like, Merchants, Agents, and the Facilitators,
as outlined below:

• Merchants: The merchants are the intermediaries who take title to the merchandise and
resell the merchandise, and thus, earn profit. They generally have the physical possession
of the goods. Some of these types of intermediaries are wholesalers and retailers.

• Agents: These are the intermediaries, sales agents, brokers, auctioneers, etc., who may
have the possession of the goods or may not have the possession of the goods, but in no
case will have the title to the merchandise. Agents are the intermediaries, who not only
search for the buyer or seller, as the case may be, but also, make efforts to bring the buyer
and seller together and, thus, participates in the negotiation of the sale transaction on
behalf of the seller, as the case may be.

• Facilitators: These are the intermediaries who assist in the distribution process of the
merchandise, wherein, they may or may not have the physical possession of the
merchandise, as the case may be. However, but, in no case they will have the title to the
merchandise or negotiate purchase or sales transaction. Transportation companies,
Independent Warehouses, Banks, Advertising Agencies, Insurance Companies, etc., are
some of the intermediaries in the category of the facilitators.

10.3 The Importance of Channels

The marketing mix decision, namely, the product, price, place and the promotion are the inter-
related decisions. Therefore the decisions or the strategy of the marketer affects the other
marketing decisions also, are among the most critical decisions, which has to be taken with great
care. Channel choices themselves depend on the company’s marketing strategy with respect to
segmentation, targeting, and positioning. Channel design decisions involve relatively long-term
commitments with other firms as well as the set of policies and procedures, which therefore,
demands the holistic perspective from the marketers in the present dynamic market conditions,
which would result into the collective maximization of the value in the varied marketing decision
areas. The channel decisions, also involves the emphasis from the marketers to both the push as
well as the pull marketing strategy. A push strategy uses the manufacturer’s sales force, trade
promotional money, or other means to induce intermediaries to carry, promote, and sell the
product to end users. The push strategy is suitable, generally in the case when there is the low
brand loyalty in a category; brand choice is made in the store; the product is an impulse item, and

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product benefits are well understood. However, the manufacturer using the pull strategy uses
advertising, promotion, and other forms of communication to persuade consumers to demand the
product from intermediaries, thereby, inducing the intermediaries to order it. Pull strategy is
generally suitable for the high brand loyalty and high involvement in the category, when
consumers are able to perceive differences between brands, and when they choose the brand
before they go to the store. The marketing activities, directed towards the channel as the part of
the push strategy, becomes more effective when accompanied by the well-designed and well-
executed pull strategy that activates consumer demand. However, in order to gain the channel
acceptance and support, the development of at least some consumer interest becomes inevitable.

10.4 Channel Development

The local operations of selling the merchandises in the limited market are started by any new firm
by using the existing intermediaries, which is usually limited to the few manufacturers’ sales
agents, a few wholesalers, several established retailers, a few transportation companies, and few
warehouses. These marketing firms do face difficulties in deciding the best channels for their
network, but the major difficulty is involved in the convincing the available present intermediaries
to carry and handle the firm’s merchandise line. Thus, the success of the firms on this front would
assist the firm to determine whether the firm might branch into new markets and use different
channels in different markets.
However, it is but obvious that the composition of the channels to be adopted by the firm may
gradually change from one market to the other, from one locality to the other, from one product
category to the other product category, from one country to the other country; or ranging from the
direct selling by the firm to the retailers in the some smaller markets or through the distributors in
the other larger markets. The marketing firms for the making the product available in the rural
areas, might work-out for the channel network with some of the general-goods merchants,
simultaneously dealing with the limited-line merchants in urban areas. In other words, in one part
of the country, it might be operative with the exclusive franchises, while in other, it might sell
through the available varied outlets, who are interested in handling the merchandise. The channel
decisions of the marketers for the international markets may vary from the partnership decisions to
the adopting of the services of the international sales agents, which vary with the shopping habits
of the customers’ of the different countries. Many retailers’ channel design decisions are
exemplified below for your better understanding. Retailers, namely, Germany’s Aldi, the United
Kingdom’s Tesco, and Spain’s Zara, while entering in the new market have redefined their channel
distribution strategy to certain extent enabling better tailoring of their image to local needs and
wants. While, there are also the retailers in the global market who have largely stuck to the same
selling formula irrespective of the geographical differences, although have sometimes encountered
trouble in entering new markets such as Eddie Bauer, Marks & Spencer, and Wal-Mart. Thus, the
channel system of any firm evolves as a function of local opportunities and conditions, emerging
threats and opportunities, company resources and capabilities, and other factors.
Many companies in the present scenario have started using such hybrid channels, with many
successful companies multiplying the number of ‘go-to-market” or hybrid channels in any one
market area. The company while adopting hybrid channels must assure its effective working all
together and whether it matches with each target customer’s preferred ways of doing business.

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The features of the channel system that sufficiently satisfy the channel integration expectation of
the customers are, such as, the ability to order a product online and pick it up at a convenient retail
location; the ability to return an online-ordered product to a nearby store of the retailer; the right to
receive discounts and promotional offers based on total online and off-line purchases, etc.
For example, The ICICI Bank uses the combination of hybrid channels such as branches,
franchisees, kiosks, and micro-finance institutions, to target its four kind of different market
segments in the rural markets, namely, rich, small and medium enterprises, the middle class, and
the low-income group.
Apart from this the channel design system of HP Company also exemplifies the same, by using its
sales force for selling to the large accounts, outbound telemarketing to sell to medium-sized
accounts, direct mail with an inbound number to sell to small accounts, retailers to sell to still
smaller accounts,

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and the Internet to sell specialty items. Moreover, it has used its traditional retail channel as well
as other mediums like direct-response Internet site, virtual malls, and thousands of links on
affiliated sites to serve its staples’ market.

10.5 The Role of Marketing Channels: Channels Functions

The producers and the manufacturers, desiring to gain the effectiveness and efficiency, necessarily
need to delegate some of the selling activities of the produced merchandise to the various types of
the intermediaries. Thus, the key role to be performed by the marketing channel comes on the
surface in the process of moving the goods from producers to the consumers. It is generally with
the cumulative benefits received as a result of the intermediaries’ contacts, experience,
specialization, and scale of operation, that the wide availability and accessibility of the
merchandise to the target markets is made possible. Moreover, it also overcomes the time, place,
and possession gaps that separate goods and services from those who need or want them. Thus, the
various functions performed by the intermediaries offer the firms the synergistic effect, i.e.,
actually more than the manufacturers and producers can achieve independently. The key functions
performed by the various categories of intermediaries are as discussed below:
1. Information:
Intermediaries, merchants and agents, do gather various information about potential and current
customers, competitors, and other actors and forces in the marketing environment, which are,
certainly, of crucial importance, not only to the producers and suppliers of the various products,
but also for the potential consumers of the target markets. The manufacturers, the producers, as
well as the present and the potential consumers would have to experience the hectic session of the
information surfing for the required product and product-related information in the absence of the
intermediaries.
2. Disseminating:
The intermediaries not only gather the information but also develop and disseminate the
persuasive communications in order to stimulate the purchasing of the products and services by
the targeted groups, which is the ultimate objective of the intermediaries functions, consequently,
also accomplishes the purpose of meeting the sales target of the merchandise, if/when the related
information is disseminated as and when seeked for by the sources authorized for such
information flow.
3. Negotiating:
The role of the intermediaries like agents and auctioneers is to finalize the sale transaction by
negotiating on the price and other related terms obstructing the finalization of the sale transaction,
thus, assist the actual transfer of ownership or possession as the case may be.
4. Ordering:
Intermediaries such as the wholesalers and retailers purchases the merchandise from the
manufacturers in bulk and small quantity respectively, and re-sell the produces the potential
consumers of the target markets, by earning profits on the same. The intermediaries by enabling in
the ordering, also assists the potential consumers to avail and access the required product, without
placing the purchase orders directly with the manufacturers.
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5. Financing:
Intermediaries, like, wholesalers also acquire the funds required to finance inventories at different
levels in the marketing channel, through the banks and other financial institutions, for the
purchasing of the produces. The facilitators, the one of the category of the intermediaries, for
example, the banks and other financial institutions, does facilitates the funding for the bulk
purchase of the merchandise by financing, as per the pre-decided terms and conditions.
6. Risk:
The intermediaries like, insurance companies, banks, del credere agents and other, in the
facilitators category of intermediary, do assume the risks involved in the distribution of the
products from the particular destination or party to the another destination or party in the flow of
the movement of the produces ultimately. Thus, the intermediaries assist in the smooth flow of the
merchandise by controlling the degree of the uncertainty involved in the distribution.
7. Storing:
The intermediaries, desiring to stock the produces in bulk necessarily have to be equipped by well
structured warehouses, or at times can also avail the services of the warehousing agencies. In the
absence of the personal storage infrastructure, such parties may avail the services from the
warehouses which ensure the successive storage and movement of the physical products, for
which various wholesalers as well as the independent warehouses performs an active function for
the same.
8. Payment:
Various banks and financial institutions enable the movement of the funds from one person to
another, from one place to the other, by performing varied banking activities, and thus, enable the
payment of the bills as well as the realizing of the funds. Not only the aforementioned
intermediaries, but also some of the wholesalers, assist the purchase/sale transaction by providing
the credit facilities and the installment mode of the making the payments to the buyers by the
manufacturers, or wholesalers or the retailers or the end-users.
9. Title:
The final stage of the movement of the goods is from the manufacturer to the end-user, which is
ensured with the transfer of the ownership rights from the purchaser to the buyer, the end-user.
The final destination of the transfer of the title to the goods and the obstacles in the movement of
the goods, thereby are streamlined.

10.6 Channel Flows

The various key functions performed by the different intermediaries, be it the wholesalers or the
retailers, the agents or the facilitators, constitutes the different flow of the constituents of the sale
transaction as well as the produces, resulting into, either of the forward or the backward flow, or
both. Backward flow refers to flow of activity from customers to the company while forward flow
refer to the flow of the activity from company to the customer and, the two-way flow refer to the
flow of activity from both the directions, i.e., from company to customer as well as from customer
to company.

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The functions, namely, physical, title and promotion constitutes a forward flow of activity from
the company to the customer, while some other functions, namely, ordering and payment,
constitute a backward flow from customers to the company, and the functions, information,
negotiation, finance, and risk taking, occurs in both the directions. These flows can be understood
individually and not from the only one diagram as it increases complexity. These five flows are
diagrammatically represented below:
1. Physical Flow

Figure 10.1
A manufacturer selling the physical goods may require at least the above mentioned three to four
intermediaries. Moreover, as it is not possible to move the physical goods from one place to
another in the absence of the transportation services, the role of this intermediary is mentioned in
the physical flow of the goods at all the points wherever the movement of the physical possession
of the goods is involved. Also, generally, the goods physically from the suppliers, through
transportation to the manufacturers, after being processed, moves from the manufacturers as the
finished products through transportation and warehouses services to the dealers, who further
moves the same to the customer, again through the transportation services. This flow of the
activity is described as the forward flow, and activity is also presented diagrammatically above. 2.
Dealers

Figure 10.2
When the goods move physically form one party to another, the physical movement of the goods
is not necessarily accompanied by the movement of the title of the goods. But, the title of the
goods is moved when the goods are purchased by one party to another party, i.e., from the
suppliers to the manufacturer, from manufacturer to dealers and from the dealers to the customers.
The other intermediaries like transporters and warehouses, as mentioned in the physical flow, may
possess the goods physically. However, but in no case they will have the ownership rights on those
goods. The title flow is as described above in the diagram ‘title flow’, which is the forward
movement of the activity.
3. Payment Flow

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 Figure 10.3
The movement of the goods physically involves various parties, intermediaries in the activity, but
the ‘payment flow’ moves among the parties involved in the movement of the title to the goods,
connecting each party with the other through the flow of the payment with the help of the banking
services. Here, the payment flow refers only to the movement of the payment among the parties
having the right to the ownership to the distribution of the goods. The ‘Payment Flow’ is as
described above in the diagram, which is the backward flow of the activity.
4. Information Flow

Figure 10.4

The movement of the information among the intermediaries flows two-ways, i.e., in forward as
well as in backward direction. The information related to various aspects of the intermediaries
flows from various parties to the other parties, each party with some important information to
share with the other party involved in the sale transaction. The flow of the information is as
described above in the ‘Information Flow’.
5. Promotion Flow

Figure 10.5

The manufacturer often undertakes various promotional efforts to promote the produces in the
market in order to attract the large number of the potential consumers, via attracting the large
number of the middlemen, and thereby make the produce available to the end-users.
Here, the manufacturer may adopt the ‘Push Strategy’ or the ‘Pull Strategy’. The Push Strategy of
the promotion refers to influencing and persuading the middlemen to carry the company’s product,
to carry more of the company’s product, ensuring the shelf-space for the company’s products.
While, the ‘Pull Strategy’ focuses on the first level communication about the products related
information and promotional campaigns directly to the customer, and the customers themselves
inquire about the product with the dealers for its purchase. The same idea of the varied
promotional strategies, with the help of the services of the advertising agencies as practiced is
described in the diagram above, ‘Promotion Flow’.
The varied channels, normally describes the forward movement of the products from source to the
user, but there are also reverse-flow channels, which are important in varied situations such as,
reusage of the products or containers, such as refillable chemical-carrying drums; refurbish

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products, such as circuit boards or computers for resale; recycle products such as paper; and to
disposing of the products and packaging in case of the waste products. Whiles, several other
intermediaries play the role in reverse-flow channels, including manufacturers’ redemption
centers, community groups, traditional intermediaries, such as, soft-drink intermediaries, trash-
collection specialists, recycling centers, trash-recycling brokers, and central processing
warehousing. The manufacturer selling a physical product and services might require three
channels, namely, a sales channel, a delivery channel, and a service channel. Some of the common
features in various functions of the channels are that, they use up scarce resources, their
performance can be enhanced by specialization and they can be shifted among the other channel
members. Moreover, the producer’s cost and prices are lower when some functions of the
intermediaries are shifted by the manufacturers, but the intermediary does adds a charge to cover
its work, as applicable. Thus, changes in channel institutions largely reflect the discovery of more
efficient ways to combine or separate the economic functions providing assortments of goods to
target customers.

10.7 Channel Levels

Every channel, directly or indirectly are linking the producers and the final customers. However,
the number of the varied channels designates the length of the channel and the level of the
channels. In the figure below, several consumer-goods marketing channels of different lengths are
mentioned.
The zero-level channel, also called as the direct marketing channel, consists of a manufacturer
which sells the goods directly to the final consumer, without the involvement of any of the
intermediary. To illustrate, the door-to-door sales, home parties, mail order, telemarketing, TV
selling, Intermit selling, and manufacturer-owned stores. Also, the Eureka Forbes sales
representatives sell their products door-to-door; Tupperware representatives sell kitchen goods
through home parties; Asian Sky Shop sells products through TV commercials or longer
infomercials; Amazon and IndiaTimes sell their products online; and Bata and Indian Oil/Bharat
Petroleum sell products through the manufacturerowned stores and petrol pumps, respectively.
While, the one-level channel contains only single selling intermediary, such as a retailer, in
comparison to the two-level channel, which contains the two intermediaries, generally, the
wholesaler and the retailer in the consumer markets. However, the three level channels contain
three intermediaries, generally, the wholesaler, the jobber, and the retailer, as the case may be.
Figure 10.6 shows channels commonly used in B2B (Business to Business) marketing. An
industrialgoods remanufacturer can use its sales force to sell directly to industrial customers; or it
can sell to industrial distributors, who sell to the industrial customers; or it can sell through
manufacturer’s representatives or its own sales branches directly to industrial customers, or
indirectly to industrial customers through industrial distributors. Zero-, one-, and two-level
marketing channels are quite common.

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 Figure 10.6 : Industrial Marketing Channels
However, the marketing channels are not only limited to the distribution of physical goods, as the
suppliers of the services and ideas also face the problem of making their output available and
accessible to the target populations. For example, Schools develop “educational-dissemination
systems” and hospitals develop “health-delivery systems”, thus, figuring out agencies and
locations for reaching the population spread out over an area. Marketing channels also keep
changing in ‘‘person” marketing. Besides live and programmed entertainment, entertainers,
musicians, and other artists can reach prospective and existing fans online in many ways, by
creating their own Web sites, social community sites such as MySpace, and third-party Web sites.
Service industries such as banking, insurance, travel, and stock buying and selling are enriched
and operating with the new channels, with the development of Internet and other advance
technologies.

10.8 Channel Design Decisions and Channel Selection

The channel selection is not the dilemma in the absolute terms, but when considered in the relative
terms, it is the complex issue, as the product has to be made available to the end user, ultimately,
but the challenge to the marketing activity is how should be the channel organized and the what
should the varied channel design systems, and of how many number of intermediaries it should be
comprised of in order to meet the customers’ desired service output levels, and degree of terms
and conditions involved in the contract agreement, formally or informally with the various
decisions. These are the major efforts which are required to analyzed by the marketer, while,
designing the marketing mix strategy, in specific, and performing the marketing activities, in
general. The channel selection involves the influences of the various factors at the various stages
of its decision making, which is discussed, stage wise, in the this part of the unit. Amongst the
various considerations for designing/selecting of the marketing channel system, Analyzing
Customer Needs, Establishing Channel Objectives, Identifying Major Channel Alternatives and
Evaluating the Major Channel Alternatives, along with the stage specific factors, are the crucial
decisions to be taken by any marketer, The steps for channel design decisions are, thus, as
explained below:

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1. Analyzing Customers’ Desired Service Output Levels: Channels or the intermediaries
are basically making the desired product available to the consumer conveniently, in the expected
quantity, at expected price, out of the maximum possible product varieties and so on. The ultimate
objective of the channel is met by the marketer only if the expectations of the desired output levels
of the intermediaries by the customers are accomplished. Thus, the marketers have to design the
marketing channel after understanding the service output levels desired by the target customers.
Thus, the first category of the factors that affects the channel selection decisions are in relation to
the desired service output levels of the customers’. The desired service output levels of the
consumers in terms of the five service outputs as produced by the channels are explained below:

a. Lot Size: The lot size refers to the number of units of the particular product item permitted
to be carried by the particular channel to the typical customer to be purchased on one
occasion. Thus, it provides the customers with an opportunity to purchase the product in
lot size as desired by the customers, through the channel as selected by the consumer.

b. Waiting and Delivery Time: The general common characteristic of all the customers is
that they increasingly prefer faster and faster delivery channels, with minimum waiting
time for the receipt of the goods. One of the purpose of using the services of the
intermediary is delivering the benefit of the convenience in the product
acquisition/purchase by the customer through the particular channel.

c. Spatial Convenience: The spatial convenience refers to the expansion of the

intermediaries substantially and thereby increasing the distribution outlets of the company,
by which the products of the company. To illustrate, Bata and Exide Batteries, in the last
few years have increased their distribution outlets by expanding their intermediaries
substantially to access the products of the company.

d. Product Variety: The product variety refers to the product assortment breadth, which is
provided by the particular intermediary. Generally the consumers prefer to purchase from
the channel that offers the wide product assortment, which enable the wide product choice
to the consumers, and thus, increase the probability of the finding out the required product
by the consumer.

e. Service Backup: The service back-up refers to the add-on services, like, credit, delivery
installation, repairs, etc., provided by the channel intermediary. The greater the service
backup, the greater the work provided by the channel. Moreover, for the certain products
like, vehicles, electrical products and gadgets, these add-on services are inevitable. Also,
the provision of such add-on services by the intermediaries maintains and enable in
sustaining the functional performance of the product, reduces the varied perceived risks by
the consumers and thus, maintains raising and sustaining of the brand image of the
company manufacturing such product.
However, designing by the producer, or finding the channel intermediary, meeting the desired
service output levels of the channels as expected by the consumers, has the direct positive
relationship with the channel costs, which acts as the constraint. At the same time, the marketer
shall also consider that the varied service output level needs of the target consumers, and shall
take the decision accordingly. To illustrate, the success of discount stores indicate that many
consumers are willing to accept smaller service outputs if they can save money.

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2. Establishing Objectives and Constraints: The targeted service output levels by the
marketers are stated in the form of the channel objectives by the marketers. But at the same time,
the companies shall also determine the clear outline of the limitations or the constraints which to
be overcome in order to accomplish the pre-determined objectives. However, for any marketer, the
sole important objective for designing the channel design system, in spite of the varied
competitive conditions, is the channel institutions providing the desired levels of service outputs
without compromising their functional tasks to minimize total channel costs.
Undoubtedly, the channel objectives vary with the product characteristics like, perishability; bulky
products; standardized and non-standardized products; installation and maintenance services and
high-unit-value products. For example, the marketers of the perishable products require more
direct marketing in comparison to the marketers of the bulky products, such as building materials,
which requires the channels that minimizes the shipping distance and the amount of handling
costs. However, for the non-standardized products, such as, custom-built machinery and
specialized-business forms, the company sales representatives will be more appropriate, while, the
company dealers or the franchise dealers will be more appropriate for the products requiring
installation or maintenance services, such as, heating and cooling systems. The company sales
force will be more suitable for the products with the high-unit-value products, such as generators
and turbines, rather than involving any intermediary within.
The type of the marketing environment also plays an important role in the channel selection and
the determination of the varied channel selection objectives. For example, during the depressed
economic conditions in the country, the producers usually opt for the shorter channels and with
reduced or without services, i.e., with the reduced final price of the goods, moving in the selling
market.
The channel selection objectives are also affected by the legal regulators and restrictions. In most
of the countries, the law looks upon, unfavourably, on the channel arrangements, which
substantially lessen the competition or create the monopoly in the market either of the channels or
of the manufacturing firm to the channel.
The number of other factors that affects channel objectives are the competitors’ characteristics,
intermediaries’ characteristics, legal characteristics, country’s characteristics as well as the
company characteristics as a whole with the products’ characteristics affects the channel
objectives selection.

3. Identifying and Evaluating Major Channel Alternatives: The final channel selection is done
after the varied channel objective fulfillments are compared with respect to the available channel
in the specific product segment or the market segments. The companies has the option of the
selecting the either of, or the combination of the varied channels, for making the produces
available to the target markets, from the various channels, such as, the sales forces; agents;
distributors; dealers; direct mail; telemarketing and the Internet, each with the some strengths and
weaknesses.
For example, the complex product characteristics and transactions can be handled effectively by
the sales force, but channel is very expensive in comparison to the internet mode of the making
the product available to the consumers. While, on the other side, the company can gain sales, also
by using the services of the distributors, however, this would be at the cost of loss of the direct
contact of the marketer, here the manufacturer, with the customers. The another intermediary, the
manufacturers’ representatives, however, are able to contact customers at a low cost per customer,
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as the cost is shared by the several clients, with the only limitation of the less intensive selling
effort per customer in comparison to the company sales representatives.
Therefore, it has been found that the most of the companies, the marketers, has started using the
hybrid channels, which has enabled the marketers to reach to the different segment of the buyers
and deliver the right product at the least cost. However, in case, the objective accomplishment
fails it has the risk of the resulting into the channel conflict and excessive cost.
The channel alternative to be considered by the marketers can be described by the three elements,
namely, the types of available business intermediaries, the number of intermediaries needed, and
the terms and responsibilities of each channel member, which are as explained below:
A. TYPES OF INTERMEDIARIES:
There are various types of the intermediaries available, from the traditional intermediaries
to the modern innovative channels which are to be adopted by the firms. For example, the
state government has made the use of the direct distribution channel using the mobile vans,
to make the subsidized food grains available to the remote villages, although has been
altered later slightly with the help of the available insight on the basis of the tribal
customer buying behaviour, it has also started distributing the food grains by visiting the
periodic markets, i.e., hoofs, and agricultural markets, i.e., mandis, with the considerable
reduction in the distribution costs.
Some of the illustrations of such innovative marketing channels are, that used by the India
times Web marketing site and ITC’s e-Choupal.
Also, with the company’s experiencing the difficulties, or increased cost, or ineffectiveness
of the working with the dominant channel, the companies sometimes also opts for the new
or unconventional channel.
For example, In India, direct selling of the vacuum cleaners and Aqua guard water
purifiers by Eureka Forbes.
B. NUMBER OF INTERMEDIARIES:
There are three strategies available for the companies to take decisions on the use of
number of intermediaries at each channel level, which describes the total number of the
intermediaries set by the marketers/company through which the products or the
merchandise can be made available to the customers, namely, the exclusive distribution,
selective distribution, and intensive distribution., which are as explained below:
1. Exclusive distribution: Exclusive distribution refers to the strategy of the
company to severely limit or restricts the number of intermediaries. This type of the
distribution systems are more appropriate when the producer wants to maintain the control
over the service level and outputs offered, in order to obtain more dedicated and
knowledgeable selling from the intermediaries.
This type of distribution has become the mainstay for those specialists who are looking for
an edge in the price driven business world, and has been considered as the means of the
very important closer partnership between the seller and reseller. The exclusive distribution
strategy is generally suitable in the distribution of new automobiles, some major
appliances, some women’s apparel brands, or the very expensive unique ornamental
products.
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For example, The legendary Italian designer label Gucci when realized about its stained
image severely due to the overexposure from licensing and discount stores, it took
decision to end such contracts with the third-party suppliers, control its distribution, and its
own stores to bring back, and thus, took decision for opening its own stores with the
objective of bringing back some of the luster, with the help of the exclusive distribution
strategy.
2. Selective distribution: The selective distribution strategy of the company refers to
the use of the more than few but less than all of the intermediaries willing to carry a
particular product of the company. This type of the distribution strategy is suitable for the
established companies and for those new companies who seeks the distributors. In this
type of the strategy the company is relatively free from managing too many outlets, and
can comfortably manage the too many outlets. The company with the help of the selective
distribution can thus, successfully gain the adequate market coverage with more control
and less cost as compared to the intensive distributions.
3. Intensive distribution: The intensive distribution strategy refers to the placing of
the goods or services in as many outlets as possible by the manufacturer, which is
generally used for the varied products such as, the snack foods, soft drinks, newspapers,
candies and gum, which is frequently seeked by the consumers in the variety of locations.
For example, Western Union in Pakistan has outlets throughout the country. Titan Watches
in
India sells its watches through seven different channels, namely, World of Titan, Time
Zone, Valuemart outlets, Sonata stores, Titan Signet Club, Tanishq boutiques, and private
mustier and outlets.
These channels—some of which are only present in selected cities provide Titan with a
wide coverage, cover different price points, and target different segments of customers. It
helps Titan generate sales volume while protecting its brand image at the same time.
It is very natural, that most of the manufacturers are often tempted to move from the
exclusive or the selective distribution to the more intensive distribution channel in order to
increase the coverage and sales of their products in the target market networks. However,
this type of strategy, although may help in the short run, but it can hurt long-term
performance. Undoubtedly, the intensive distribution increases the product and services
availability, and encourages the retailers to compete aggressively, while the price wars
within can harm the profitability, which may potentially dampen the interest of the retailer
in supporting the product and harms the brand equity. Therefore, some of the firms do take
the decision to avoid intensive distribution and do not want to be sold everywhere.

C. TERMS AND RESPONSIBILITIES OF CHANNEL MEMBERS:

The terms and responsibilities of the channel member say that the each channel member
must be treated respectfully and given the opportunity to be profitable. The main elements
in the “traderelations mix” are price policies, conditions of sale, territorial rights, and
specific services to be performed by each party which are as outlined below:
i. Price Policy: It refers to the establishing of the price list and schedule of discounts
and allowances that intermediaries refer to as the equitable and sufficient by the producer.

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 ii. Conditions of sale: Conditions of sale refer to the payment terms and producer
guarantees. Most producers grant cash discounts to the distributors for the early payment,
or the guarantee against defective merchandise or price declines. Such type of guarantee
against price declines gives distributors an incentive to buy larger quantities.

iii. Distributors’ territorial rights: It defines the distributors’ territories and the terms
under which the producer will enfranchise other distributors. Normally, distributors expect
to receive full credit for all sales in their territory, whether or not they did the selling. Also,
in the franchised and the exclusive-agency channels, mutual services and responsibilities
must be spelled out very carefully. For example, McDonald’s provides franchisees with a
building, promotional support, a recordkeeping system, training, and general
administrative and technical assistance. In turn, franchisees are expected to satisfy
company standards for the physical facilities, cooperate with new promotional programs,
furnish requested information, and buy supplies from specified vendors.
4. Evaluating the Major Alternatives: Each channel alternative needs to be evaluated against the
economic, control, and adaptive criteria, which are as explained below:
A. ECONOMIC CRITERIA:
Each channel alternative produces the different level of sales and costs, and the firms
makes efforts to align the customers and channels to maximize demand at the lowest
overall cost. Clearly, sellers try to replace high-cost channels with low-cost channels as
long as the value added per sale is sufficient. As an example of an economic analysis of
channel choices, consider the following situation. Suppose a Delhi-based branded furniture
manufacturer wants to sell furniture in the southern markets. The manufacturer has to
decide between two alternatives, as the manufacturer’s sales agency and the company sales
force. The company can either hire 10 new sales representatives who will operate from
offices in Bangalore, Chennai, and Hyderabad, receiving a base salary plus commissions,
apart from company meeting the expensed of setting up the office-cum-residence for these
employees.

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 Figure 10.7
The first step in the analysis is to estimate what sales are likely to be generated by a
company sales force or a sales agency with 30 representatives. On one hand, a company
sales force is better trained to sell the company’s products enabling them to concentrate on
the company’s products. The company’s sales force will make aggressive efforts because
each representative is aware of the fact that their future depends on the company’s success.
While, on the other hand, the sales agency has 30 aggressive representatives, not just 10,
as the direct sales force, depending on the commission level, can be better received by
customers as more independent agency. It benefits the company with its extensive contacts
and marketplace knowledge.
With the help of the diagram above, the costs of selling different volumes through each of
the channel has to be evaluated. Through the given figure, although the fixed costs of
engaging a sales agency are lower than those of establishing a new company sales office,
its costs rise faster through an agency because sales agents get a larger commission as
compared to the company salespeople, which shall be considered by the marketers.
The final step, in evaluating the alternative on the economic criteria involves the
comparative evaluations of the sales and the costs involved in both the alternatives. As
mentioned in the figure above, there is one sales level (SB) at which selling costs are the
same for the two channels. The sales agency is thus, the better channel for any sales
volume below S, and the company sales branch is better at any volume above S. Given this
information, it is not surprising that sales agents tend ‘10’ be used by smaller firms, or by
large firms in smaller territories where the volume is low.
B. CONTROL CRITERIA:
The control criteria for the selection of the intermediaries refer to the extent to which the
selected intermediary permits the company, the producer to exercise its control, in spite of
the considerable role of the direct contact with customers performed by these
intermediaries. The hold of the producer on the intermediary, the company sales force, has
been maximum in comparison to the alternative of hiring the sales representatives by the
manufacturers’ sales agency, on the basis of the various aspects of making the products
available to the consumers. While, the company’s sales force can exclusively perform the
task of promoting the company’s own image and the products Moreover, the company
sales force is exclusively performing the task of promoting the company’s own image and
the products related thereby.
C. ADAPTIVE CRITERIA:
This criteria focus on the selection of the intermediaries with reference to the degree of
flexibility permitted to the manufacturer/producer by the particular intermediary and the
future changes in the characteristics of the distribution system. The characteristics of the
distribution system refer to the terms and conditions on the payment terms, pricing policy,
no. of intermediaries with the distributor’s rights, discontinuing of some of the
intermediaries, the fixed cost involved in managing the intermediaries, as the case may be.
The example discussed in the above diagram, poses the control problem with the respect to
the use of the sales agency as one of the distribution channel which desires to maximize
the profit, as its concentrates more on the maximum buying customers, and not necessarily
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 on those who buy the manufacturer’s goods. Moreover, it may be possible that the agents
might have not reached the required level of the expertise, for dealing varies technical
details of the company’s product or handle its promotion materials effectively which may
undoubtedly control their contribution in the generation of the sales revenue for the
company.
Thus, the adaptive criteria emphasize on the degree of commitment among the channel
members for a specified period of time, keeping in mind that such commitments invariably
lead to the decrease in the producer’s ability of responding to the changing marketplace.
The adaptive criteria go with the flexibility characteristics as needed by the producers at
the time of the preferred channel structure and policies that have high adaptability. The
channel offering greater adaptability to the manufacturer thus, may be selected by the
manufacturer in the competitive, dynamic marketing environment.

10.9 Summary

‘Channels’ refers to the links between the manufacturers and the consumers, the pathways,
followed by the products and services after production, culminating in purchase and use by the
final end user, which thus, bridges the gap between the manufacturers and the consumers, who
perform varied functions, such as, negotiating, promotion, informing, financing, storing, ordering,
etc.
Undoubtedly, the companies are inevitably required to create and manage the continuously
evolving and increasingly active channel system and the value network, for making their products
and services available to the consumers in the target market. These network may involve,
intermediaries of the either or all of the three types, i.e., the Merchants, Agents, and the
Facilitators. Moreover, as the marketing channel system decisions affects the other marketing
decisions too, the channel design decisions has to be taken with great care and therefore are among
the most critical decisions.
Thus, the various functions performed by the intermediaries offer the firm the synergistic effect,
constituting the different flows of the constituents of the sales transactions as well as the produces,
namely, the forward flow, backward flow as well as the two-way flow. In managing the
intermediaries, the firm must choose between the push versus pull marketing strategy.
The number of intermediaries decides the levels of the flow. However, the decisions pertaining to
the selection of the channel intermediaries is affected by the various factors at the various stages
of the channel design decisions, namely, Analyzing Customer Needs, Establishing Channel
Objectives, Identifying Major Channel Alternatives and Evaluating the Major Channel
Alternatives. An elaborated explanation of the same has been provided in the chapter, hereby.

10.10Self Assessment Questions

1. Define Channels of Distribution. Discuss with suitable examples the functions of the
channels of distribution.

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2. Define the Channels of Distribution. Explain the various types of the channels of the
distribution.

3. Explain the levels and flows of the channels, providing suitable examples.

4. Discuss the various steps involved in the channel design decisions in detail with
suitable examples.

5. Describe the various criteria for the evaluation of the channel selection.

10.11 Reference Books

- Kotler P. and Keller K; 2006; Marketing Management; 12th Edition; P- 443 and P- 539;
PearsonPrentice Hall; Delhi
- Philip Kotler; 2004; Marketing Management; 11th Edition; Pearson Education

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 Unit - 11 : Physical Distribution of Goods

Structure of Unit:

11.0 Objectives
11.1 Introduction
11.2 Meaning of Physical Distribution System
11.3 Objectives of Physical Distribution
11.4 Components of Physical Distribution System
11.5 Summary
11.6 Self Assessment Questions
11.7 Reference Books

11.0 Objectives

After completing this unit, you would be able to understand:

• The meaning of physical distribution system
• Objectives of physical distribution system
• Components of physical distribution system

11.1 Introduction

Physical distribution is the set of activities concerned with efficient movement of finished goods
from the end of the production operation to the consumer. Physical distribution takes place within
numerous wholesaling and retailing distribution channels, and includes such important decision
areas as customer service, inventory control, materials handling, protective packaging, order
procession, transportation, warehouse site selection, and warehousing. Physical distribution is part
of a larger process called “distribution,” which includes wholesale and retail marketing, as well
the physical movement of products.

11.2 Meaning of Physical Distribution System

Physical Distribution Management is concerned with ensuring the product is in the right
place at the right time.
According to W.J.Stanton, “physical distribution is the management of physical flow of products
and the establishment and storage of goods after they are produced and before they are
consumed.”
McCarthy has defined it as, “physical distribution is the actual handlling and moving of goods
within individual firms and along channel systems.”
To some managers, physical distribution means only trucks and warehouses. But modern logistics
is much more than this. Physical distribution—or marketing logistics—involves planning,
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implementing, and controlling the physical flow of materials, final goods, and related information
from points of origin to points of consumption to meet customer requirements at a profit. In short,
it involves getting the right product to the right customer in the right place at the right time.
Traditional physical distribution typically started with products at the plant and then tried to find
low-cost solutions to get them to customers. However, today’s marketers prefer market logistics
thinking, which starts with the marketplace and works backward to the factory. Logistics
addresses not only the problem of outbound distribution (moving products from the factory to
customers) but also the problem of inbound distribution (moving products and materials from
suppliers to the factory).
Physical distribution is the set of activities concerned with efficient movement of finished goods
from the end of the production operation to the consumer. Physical distribution takes place within
numerous wholesaling and retailing distribution channels, and includes such important decision
areas as customer service, inventory control, materials handling, protective packaging, order
procession, transportation, warehouse site selection, and warehousing. Physical distribution is part
of a larger process called “distribution,” which includes wholesale and retail marketing, as well
the physical movement of products.
Physical distribution activities have recently received increasing attention from business
managers, including small business owners. This is due in large part to the fact that these
functions often represent almost half of the total marketing costs of a product. In fact, research
studies indicate that physical distribution costs nationally amount to approximately 20 percent of
the country’s total gross national product (GNP). These findings have led many small businesses
to expand their cost-cutting efforts beyond their historical focus on production to encompass
physical distribution activities. The importance of physical distribution is also based on its
relevance to customer satisfaction. By storing goods in convenient locations for shipment to
wholesalers and retailers, and by creating fast, reliable means of moving the goods, small business
owners can help assure continued success in a rapidly changing, competitive global market.

11.3 Objectives of Physical Distribution

The General objectives of the logistics can be summarized as:

• Cost reduction
• Capital reduction
• Service improvement
The specific objective of an ideal logistics system is to ensure the flow of supply to the buyer, the:
• right product
• right quantities and assortments
• right places
• right time
• right cost / price and,
• right condition
This implies that a firm will aim at having a logistics system which maximizes the customer
service and minimizes the distribution cost. However, one can approximate the reality by defining
the objective of logistics system as achieving a desired level of customer service i.e., the degree of
delivery support given by the seller to the buyer. Thus, logistics management starts with as
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curtaining customer need till its fulfilment through product supplies and, during this process of
supplies, it considers all aspects of performance which include arranging the inputs,
manufacturing the goods and the physical distribution of the products. However, there are some
definite objectives to be achieved through a proper logistics system.
These can be described as follows:
1. Improving Customer Service:
As we know, the marketing concept assumes that the sure way to maximize profits in the long run
is through maximizing the customer satisfaction. As such, an important objective of all marketing
efforts, including the physical distribution activities, is to improve the customer service. An
efficient management of physical distribution can help in improving the level of customer service
by developing an effective system of warehousing, quick and economic transportation, all
maintaining optimum level of inventory. But, as discussed earlier, the level of service directly
affects the cost of physical distribution. Therefore, while deciding the level of service, a careful
analysis of the customers’ wants and the policies of the competitors is necessary. The customers
may be interested in several things like timely delivery, careful handling of merchandise,
reliability of inventory, economy in operations, and so on. However, the relative importance of
these factors in the minds of customers may vary. Hence, an effort should be made to ascertain
whether they value timely delivery or economy in transportation, and so on. One the relative
weights are known, an analysis of what the competitors are offering in this regard should also be
made. This, together with an estimate about the cost of providing a particular level of customer
service, would help in deciding the level of customer service. 2. Rapid Response:
Rapid response is concerned with a firm’s ability to satisfy customer service requirements in a
timely manner. Information technology has increased the capability to postpone logistical
operations to the latest possible time and then accomplish rapid delivery of required inventory.
The result is elimination of excessive inventories traditionally stocked in anticipation of customer
requirements.

Rapid response capability shifts operational emphasis from an anticipatory posture based on
forecasting and inventory stocking to responding to customer requirements on a shipment-to-
shipment basis. Because inventory is typically not moved in a time-based system until customer
requirements are known and performance is committed, little tolerance exists for operational
deficiencies

3. Reduce Total Distribution Costs:

Another most commonly stated objective is to minimize the cost of physical distribution of the
products. As explained earlier, the cost of physical distribution consists of various elements such
as transportation, warehousing and inventory maintenance, and any reduction in the cost of one
element may result in an increase in the cost of the other elements. Thus, the objective of the firm
should be to reduce the total cost of distribution and not just the cost incurred on any one element.
For this purpose, the total cost of alternative distribution systems should be analyzed and the one
which has the minimum total distribution cost should be selected.
4. Generating Additional Sales:
Another important objective of the physical distribution/logistics system in a firm is to generate
additional sales. A firm can attract additional customers by offering better services at lowest
prices. For example, by decentralizing its warehousing operations or by using economic and
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efficient modes of transportation, a firm can achieve larger market share. Also by avoiding the
out-of-stock situation, the loss of loyal customers can be arrested.
5. Creating Time and Place Utilities:
The logistical system also aims at creating time and place utilities to the products. Unless the
products are physically moved from the place of their origin to the place where they are required
for consumption, they do not serve any purpose to the users. Similarly, the products have to be
made available at the time they are needed for consumption.
Both these purposes can be achieved by increasing the number of warehouses located at places
from where the goods can be delivered quickly and where sufficient stocks are maintained so as to
meet the emergency demands of the customers. Moreover, a quicker mode of transport should be
selected to move the products from one place to another in the shortest possible time. Thus, time
and place utilities can be created in the products through an efficient system of physical
distribution.
6. Price Stabilization:
Logistics also aim at achieving stabilization in the prices of the products. It can be achieved by
regulating the flow of the products to the market through a judicious use of available transport
facilities and compatible warehouse operations. For example, in the case of industries such as
cotton textile, there are heavy fluctuations in the supply of raw materials. In such cases if the
market forces are allowed to operate freely, the raw material would be very cheap during
harvesting season and very dear during off season. By stocking the raw material during the period
of excess supply (harvest season) and made available during the periods of short supply, the prices
can be stabilized.
7. Quality Improvement:
The long-term objective of the logistical system is to seek continuous quality improvement. Total
quality management (TQM) has become a major commitment throughout all facets of industry.
Overall commitment to TQM is one of the major forces contributing to the logistical renaissance.
If a product becomes defective or if service promises are not kept, little, if any, value is added by
the logistics. Logistical costs, once expended, cannot be reversed. In fact, when quality fails, the
logistical performance typically needs to be reversed and then repeated. Logistics itself must
perform to demanding quality standards. The management challenge of achieving zero defect
logistical performance is magnified by the fact that logistical operations typically must be
performed across a vast geographical area at all times of the day and night. The quality challenge
is magnified by the fact that most logistical work is performed out of a supervisor’s vision.
Reworking a customer’s order as a result of incorrect shipment or in-transit damage is far more
costly than performing it right the first time. Logistics is a prime part of developing and
maintaining continuous TQM improvement. 8. Life-Cycle Support:
A good logistical system helps to support the life cycle. Few items are sold without some
guarantee that the product will perform as advertised over a specified period. In some situations.
the normal value-added inventory flow toward customers must be reversed. Product recall is a
critical competency resulting from increasingly rigid quality standards, product expiration dating
and responsibility for hazardous consequences. Return logistics requirements also result from the
increasing number of laws prohibiting disposal and encouraging recycling of beverage containers
and packaging materials. The most significant aspect of reverse logistical operations is the need
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for maximum control when a potential health liability exists (i.e... a contaminated product). In this
sense, a recall program is similar to a strategy of maximum customer service that must be
executed regardless of cost. Firestone classical response to the tyre crisis is an example of turning
adversity into advantage. The operational requirements of reverse logistics range from lowest total
cost, such as returning bottles for recycling, to maximum performance solutions for critical
recalls. The important point is that sound logistical strategy cannot be formulated without careful
review of reverse logistical requirements. 9. Movement Consolidation:

As the logistical system aims at cost reduction through integration, consolidation One of the most
significant logistical costs is transportation. Transportation cost is directly related to. the type of
product, size of shipment, and distance. Many Logistical systems that feature premium service
depend on high-speed, small shipment transportation. Premium transportation is typically high-
cost. To reduce transportation cost, it is desirable to achieve movement consolidation. As a general
rule, the larger the overall shipment and the longer the distance it is transported, the lower the
transportation cost per unit. This requires innovative programs to group small shipments for
consolidated movement. Such programs must be facilitated by working arrangements that
transcend the overall supply chain

11.4 Components of Physical Distribution System

There are four principal components of physical distribution system:

1. Order processing;
2. Stock levels or inventory;
3. Warehousing;
4. Transportation.
Physical distribution management is concerned with ensuring that the individual efforts that go to
make up the distributive function are optimized so that a common objective is realized. This is
called the ‘systems approach’ to distribution management and a major feature of physical
distribution management is that these functions be integrated.
There are two central themes that should be taken into account:

1. The success of an efficient distribution system relies on integration of effort. An overall

service objective can be achieved, even though it may appear that some individual
components of the system are not performing at maximum efficiency.

2. It is never possible to provide maximum service at a minimum cost. The higher the level of
service required by the customer, the higher the cost. Having decided on the necessary
level of service, a company must then consider ways of minimizing costs, which should
never be at the expense of, or result in, a reduction of the predetermined service level.
The Distribution Process
The distribution process begins when a supplier receives an order from a customer. The customer
is not too concerned with the design of the supplier’s distributive system, nor in any supply
problems. In practical terms, the customer is only concerned with the efficiency of the supplier’s
distribution. That is, the likelihood of receiving goods at the time requested. Lead-time is the
period of time that elapses between the placing of an order and receipt of the goods. This can vary

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according to the type of product and the type of market and industry being considered. Lead-time
in the shipbuilding industry can be measured in fractions or multiples of years, whilst in the retail
sector, days and hours are common measures. Customers make production plans based on the
lead-time agreed when the order was placed. Customers now expect that the quotation will be
adhered to and a late delivery is no longer acceptable in most purchasing situations.
a) Order Processing: Order processing is the first of the four stages in the logistical process. The
efficiency of order processing has a direct effect on lead times. Orders are received from the sales
team through the sales department. Many companies establish regular supply routes that remain
relatively stable over a period of time providing that the supplier performs satisfactorily. Very
often contracts are drawn up and repeat orders (forming part of the initial contract) are made at
regular intervals during the contract period. Taken to its logical conclusion this effectively does
away with ordering and leads to what is called ‘partnership sourcing’. This is an agreement
between the buyer and seller to supply a particular product or commodity as an when required
without the necessity of negotiating a new contract every time an order is placed.
Order-processing systems should function quickly and accurately. Other departments in the
company need to know as quickly as possible that an order has been placed and the customer must
have rapid confirmation of the order’s receipt and the precise delivery time. Even before products
are manufactured and sold the level of office efficiency is a major contributor to a company’s
image. Incorrect ‘paperwork’ and slow reactions by the sales office are often an unrecognized
source of ill-will between buyers and sellers. When buyers review their suppliers, efficiency of
order processing is an important factor in their evaluation.
A good computer system for order processing allows stock levels and delivery schedules to be
automatically updated so management can rapidly obtain an accurate view of the sales position.
Accuracy is an important objective of order processing as are procedures that are designed to
shorten the order processing cycle.
b) Inventory: Inventory, or stock management, is a critical area of Physical Distribution
Management because stock levels have a direct effect on levels of service and customer
satisfaction. The optimum stock level is a function of the type of market in which the company
operates. Few companies can say that they never run out of stock, but if stock-outs happen
regularly then market share will be lost to more efficient competitors. Techniques for determining
optimum stock levels are illustrated later in this chapter. The key lies in ascertaining the re-order
point. Carrying stock at levels below the reorder point might ultimately mean a stock-out, whereas
too high stock levels are unnecessary and expensive to maintain. The stock/cost dilemma is clearly
illustrated by the systems approach to Physical Distribution Management that is dealt with later.
Stocks represent opportunity costs that occur because of constant competition for the company’s
limited resources. If the company’s marketing strategy requires that high stock levels be
maintained, this should be justified by a profit contribution that will exceed the extra stock
carrying costs. Sometimes a company may be obliged to support high stock levels because the
lead-times prevalent in a given market are particularly short. In such a case, the company must
seek to reduce costs in other areas of the Physical Distribution Management ‘mix’.
c) Warehousing: American marketing texts tend to pay more attention to warehousing than
do British texts. This is mainly because of the relatively longer distances involved in distributing
in the

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USA, where it can sometimes take days to reach customers by the most efficient road or rail
routes. The logistics of warehousing can, therefore, be correspondingly more complicated in the
USA than in the UK. However, the principles remain the same, and indeed the European Union
should be viewed as a large ‘home market’. Currently, many companies function adequately with
their own on-site warehouses from where goods are dispatched direct to customers. When a firm
markets goods that are ordered regularly, but in small quantities, it becomes more logical to locate
warehouses strategically around the country. Transportation can be carried out in bulk from the
place of manufacture to respective warehouses where stocks wait ready for further distribution to
the customers. This system is used by large retail chains, except that the warehouses and
transportation are owned and operated for them by logistics experts (e.g. BOC Distribution, Excel
Logistics and Row tree Distribution). Levels of service will of course increase when numbers of
warehouse locations increase, but cost will increase accordingly. Again, an optimum strategy must
be established that reflects the desired level of service.
To summarize, factors that must be considered in the warehouse equation are:
• Location of customers;
• Size of orders;
• Frequency of deliveries; Lead times.
d) Transportation: Transportation usually represents the greatest distribution cost. It is
usually easy to calculate because it can be related directly to weight or numbers of units. Costs
must be carefully controlled through the mode of transport selected amongst alternatives, and
these must be constantly reviewed. During the past 50 years, road transport has become the
dominant transportation mode in the UK. It has the advantage of speed coupled with door-to-door
delivery.
The patterns of retailing that have developed, and the pressure caused by low stock holding and
short lead times, have made road transport indispensable. When the volume of goods being
transported reaches a certain level some companies purchases their own vehicles, rather than use
the services of haulage contractors. However, some large retail chains like Marks and Spencer,
Tesco and Sainsbury’s have now entrusted all their warehousing and transport to specialist
logistics companies as mentioned earlier.
For some types of goods, transport by rail still has advantages. When lead-time is a less critical
element of marketing effort, or when lowering transport costs is a major objective, this mode of
transport becomes viable. Similarly, when goods are hazardous or bulky in relation to value, and
produced in large volumes then rail transport is advantageous. Rail transport is also suitable for
light goods that require speedy delivery (e.g. letter and parcel post).
Except where goods are highly perishable or valuable in relation to their weight, air transport is
not usually an attractive transport alternative for distribution within the UK where distances are
relatively short in aviation terms. For long-distance overseas routes it is popular. Here, it has the
advantage of quick delivery compared to sea transport, and without the cost of bulky and
expensive packaging needed for sea transportation, as well as higher insurance costs. Exporting
poses particular transportation problems and challenges. The need for the exporter’s services
needs to be such that the customer is scarcely aware that the goods purchased have been imported.
Therefore, above all, export transportation must be reliable.
The chosen transportation mode should adequately protect goods from damage in transit (a factor
just mentioned makes air freight popular over longer routes as less packaging is needed than for
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long sea voyages). Not only do damaged goods erode profits, but frequent claims increase
insurance premiums and inconvenience customers, endangering future business

11.5 Summary

Discussion of physical distribution system usually takes place from the viewpoint of the supplier.
Understanding of physical distribution is, however, just as important to the purchaser. In addition
to understanding the distribution tasks that face the supplier, the purchasing department must also
appreciate logistical techniques for inventory control and the order cycle. There is consequently a
close link between physical distribution management and purchasing.
Work study-techniques and operations management can also be linked with physical distribution
management because management is concerned with efficiency and accuracy throughout the
distributive function. Whilst a logistical system should not be inflexible, if routines can be
established for certain functions they will assist the distribution process. As a function of the
marketing mix, physical distribution management is linked to all other marketing sub-functions
and is an important element that plays a large part in achieving the goal of customer satisfaction.

11.6 Self Assessment Questions

1 Define physical Distribution system with example.

2 What are the various components of physical distribution system?

3 Elaborate the objectives of Physical Distribution System.

11.7 Reference Books

- V.S.Ramaswamy, S Namakumari(2009); Marketing Management; MacMillan,

- S.A Sherlekar (14th edition); Marketing Management; Himalaya Publishing House,

Mumbai.

- Michael.J.Etzel, Ajay Pandit, Bruce.J.Walker, William.J.Stanton (13 th Edition),

Marketing Concepts and Cases; Tata McGraw hill Companies, New Delhi.

- James.R.Ogden, Denise.T.Ogden (2008); Integrated Retail Management; Biztantra,

New Delhi.

- Biplab.S.Bose,(2007); Marketing Management; Himalaya Publishing House, Mumbai

- Kothari, Mehta, Sharma (2009); Marketing Management; RBD Publications, Jaipur

- Phillip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha,12 th edition,
Marketing Management; Pearson Prentice Hall; New Delhi.

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 Unit - 12 : Managing Retailing, Wholesaling and Logistics

Structure of Unit

12.0 Objectives
12.1 Introduction
12.2 Meaning of Retailing
12.3 Classifications of Retail Firms
12.4 Recent Trends in Retailing in India
12.5 Creating and Managing Network of Retailers
12.6 Wholesaling: Meaning and Types
12.7 Marketing Logistics and Supply Chain Management
12.8 Summary
12.9 Self Assessment Questions
12.10 Reference Books

12.0 Objectives

After completing this unit, you would be able to understand:

• The meaning of retailing

• Types of retailing
• Recent trends in retailing in India
• Managing the network of retailers
• Difference between retailing and wholesaling
• Types of wholesalers
• Market logistics
• Supply chain management

12.1 Introduction

The total concept and idea of shopping has undergone an attention drawing change in terms of
format and consumer buying behavior, ushering in a revolution in shopping in India. Modern
retailing has entered into the Retail market in India as is observed in the form of bustling shopping
centers, multistoried malls and the huge complexes that offer shopping, entertainment and food all
under one roof for example big bazaar, hyper city, more, easy day, reliance fresh etc.
Retailing involves a direct interface with the customer and the coordination of business activities
from end to end- right from the concept or design stage of a product or offering, to its delivery and
post-delivery service to the customer. The industry has contributed to the economic growth of
many countries and is undoubtedly one of the fastest changing and dynamic industries in the
world today.

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12.2 Meaning of Retailing

The distribution of consumer products begins with the producer and ends at the ultimate
consumer. Between the producer and the consumer there is a middleman—the retailer, who links
the producers and the ultimate consumers. Retailing is defined as a conclusive set of activities or
steps used to sell a product or a service to consumers for their personal or family use. It is
responsible for matching individual demands of the consumer with supplies of all the
manufacturers. The word ‘retail’ is derived from the French word retailer, meaning ‘to cut a piece
off’ or ‘to break bulk’.

Figure 12.1 : Channels of Distribution

A retailer is a person, agent, agency, company, or organization which is instrumental in reaching

the goods, merchandise, or services to the ultimate consumer. Retailers perform specific activities
such as anticipating customer’s wants, developing assortments of products, acquiring market
information, and financing. A common assumption is that retailing involves only the sale of
products in stores. However, it also includes the sale of services like those offered at a restaurant,
parlor, or by car rental agencies. The selling need not necessarily take place through a store.
Retailing encompasses selling through the mail, the Internet, door-to-door visits— any channel
that could be used to approach the consumer. When manufacturers like Dell computers sell
directly to the consumer, they also perform the retailing function.

Retailing has become such an intrinsic part of our everyday lives that it is often taken for granted.
The nations that have enjoyed the greatest economic and social progress have been those with a
strong retail sector. Why has retailing become such a popular method of conducting business? The
answer lies in the benefits a vibrant retailing sector has to offer—an easier access to a variety of
products, freedom of choice and higher levels of customer service.

As we all know, the ease of entry into retail business results in fierce competition and better value
for customer. To enter retailing is easy and to fail is even easier. Therefore, in order to survive
in retailing, a firm must do a satisfactory job in its primary role i.e., catering to customers.
Retailers’ cost and profit vary depending on their type of operation and major product line. Their
profit is usually a small fraction of sales and is generally about 9-10%. Retail stores of different
161
sizes face distinct challenges and their sales volume influences business opportunities,
merchandise purchase policies, nature or promotion and expense control measures.

Over the last decade there have been sweeping changes in the general retailing business. For
instance, what was once a strictly made-to-order market for clothing has now changed into a
ready-to-wear market. Flipping through a catalogue, picking the right colour, size, and type of
clothing a person wanted to purchase and then waiting to have it sewn and shipped was the
standard practice in the earlier days. By the turn of the century some retailers set up a storefront
where people could browse, while new pieces were being sewn or customized in the back rooms.
Almost all retail businesses have undergone a similar transition over the years.

12.3 Classifications of Retail Firms

Regardless of the particular type of retailer (such as a supermarket or a department store), retailers
can be categorized by (a) Ownership, (b) Store strategy mix, and (c) Non store operations.

Figure 12.2 : Classification of Retail Firms

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1. Form of Ownership

A retail business like any other type of business, can be owned by a sole proprietor, partners or a
corporation.
A majority of retail business in India are sole proprietorships and partnerships.

1. Independent Retailer: Generally operates one outlet and offers personalized service, a
convenient location and close customer contact. Roughly 98% of all the retail businesses
in India, are managed and run by independents, including barber shops, drycleaners,
furniture stores, bookshops, LPG Gas Agencies and neighborhood stores. This is due to the
fact that into retailing is easy and it requires low investment and little technical knowledge.
This obviously results in a high degree of competition.. Most independent retailers fail
because of the ease of entry, poor management skills and inadequate resources.
2. Retail Chain: It involves common ownership of multiple units. In such units, the
purchasing and decision making are centralized. Chains often rely on, specialization,
standardization and elaborate control- systems. Consequently chains are able to serve a
large dispersed target market and maintain a well known company name. Chain stores
have been successful, mainly because they have the opportunity to take advantage of
“economies of scale” in buying and selling goods.
They can maintain their prices, thus increasing their margins, or they can cut prices and
attract greater sales volume. Unlike smaller, independent retailers with lesser financial
means, they can also take advantage of such tools as computers and information
technology. Examples of retail chains in India are Shoppers stop; West side and IOC,
convenience stores at select petrol filling stations.

3. Retail Franchising: Is a contractual arrangement between a “franchiser” (which may be a

manufacturer, wholesaler, or a service sponsor) and a “franchisee” or franchisees, which
allows the latter to conduct a certain form of business under an established name and
according to a specific set of rules. The franchise agreement gives the franchiser much
discretion in controlling the operations of small retailers. In exchange for fees, royalties
and a share of the profits, the franchiser offers assistance and very often supplies as well.
Classic examples of franchising are; McDonalds, Pizza Hut and Nirulas.

4. Cooperatives: A retail cooperative is a group of independent retailers that have combined

their financial resources and their expertise in order to effectively control their wholesaling
needs. They share purchases, storage, shopping facilities, advertising planning and other
functions. The individual retailers retain their independence, but agree on broad common
policies. Amul is a typical example of a cooperative in India.
2. Store Strategy Mix
Retailers can be classified by retail store strategy mix, which is an integrated combination of
hours, location, assortment, service, advertising, and prices etc. The various categories are:

1. Convenience Store: Is generally a well situated, food oriented store with long operating
house and a limited number of items. Consumers use a convenience store; for fill in items
such as bread, milk, eggs, chocolates and candy etc.

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 2. Super Markets: Is a diversified store which sells a broad range of food and non food
items. A supermarket typically carries small house hold appliances, some apparel items,
bakery, film developing, jams, pickles, books, audio/video CD’s etc.

3. Department Stores: A department store usually sells a general line of apparel for the
family, household linens, home furnishings and appliances. Large format apparel
department stores include Pantaloon, Ebony and Pyramid. Others in this category are:
Shoppers Stop and Westside.

4. Specialty Store: Concentrates on the sale of a single line of products or services, such as
Audio equipment, Jewellery, Beauty and Health Care, etc. Consumers are not confronted
with racks of unrelated merchandise. Successful specialty stores in India include, Music
World for audio needs, Tanishq for jewellery and McDonalds, Pizza Hut and Nirula’s for
food services.

5. Hyper Markets: Is a special kind of combination store which integrates an economy

super market with a discount department store. A hyper market generally has an ambience
which attracts the family as whole. Pantaloon Retail India Ltd. (PRIL) through its
hypermarket “Big Bazar”, offers products at prices which are 25% – 30% lower than the
market price.
3. Non Store Retailing
In non store retailing, customers do not go to a store to buy. This type of retailing is growing very
fast. Among the reasons are; the ability to buy merchandise not available in local stores, the
increasing number of women workers, and the presence of unskilled retail sales persons who can
not provide information to help shoppers make buying decisions. The major types of non store
retailing are:

1. In Home Retailing: Where, a sales transaction takes place in a home setting – including
doordoor selling. It gives the sales person an opportunity to demonstrate products in a very
personal manner. She/he has the prospect’s attention and there are fewer distractions as
compared to a store setting. Examples of in home retailing include Eureka Forbes vacuum
cleaners and water filters.

2. Telesales/Telephone Retailing: This involves contact between the prospect and the
retailer over the phone, for the purpose of making a sale or purchase. A large number of
mobile phone service providers use this method. Other examples are private insurance
companies, and credit companies etc.

3. Catalog Retailing: This is a type of non store retailing in which the retailers offers the
merchandise in a catalogue, which includes ordering instructions and customer orders by
mail. The basic attraction for shoppers is convenience. The advantages to the retailers
include lover operating costs, lower rents, smaller sales staff and absence of shop lifting.
This trend is catching up fast in India. Burlington’s catalogue shopping was quite popular
in recent times. Some multi level marketing companies like Oriflame also resort to
catalogue retailing.

4. Direct Response Retailing: Here the marketers advertise these products/ services in
magazines, newspapers, radio and/or television offering an address or telephone number so
that consumers can write or call to place an order. It is also sometimes referred to as
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 “Direct response advertising.” The availability of credit cards and toll free numbers
stimulate direct response by telephone. The goal is to induce the customer to make an
immediate and direct response to the advertisement to “order now.” Telebrands is a classic
example of direct response retailing.
Times shopping India is another example.

5. Automatic Vending: Although in a very nascent stage in India, is the ultimate in non
personal, non store retailing. Products are sold directly to customers/buyers from
machines. These machines dispense products which enable customers to buy after closing
hours. ATM’s dispensing cash at odd hours represent this form of non store retailing.
6. Electronic Retailing/E-Tailing: Is a retail format in which retailers communicate with
customers and offer products and services for sale, over the internet. The rapid diffusion of
internet access and usage, and the perceived low cost of entry have stimulated the creation
of thousands of entrepreneurial electronic retailing ventures during the last 10 years or so.
Amazon.com, E-bay .etc, are some of the many e-retailers operating today.

12.4 Recent Trends in Retailing in India

According to finding of “united nations conference on trade and development” at present there are
12 million retail outlets in the country and 78% are family owned businesses. These small and
medium enterprises account for nearly 60% of all retail sales of food and food related items.
While the debate on allowing the foreign direct investment (FDI) in retail continues to rage on, the
study of this UN organization revealed that only 3% of the country’s population shops at modern
retail outlets. Only 4% of the retail chains in the country have a floor area of more than 500 sq. ft.
the 97% of population is dependent on small retail outlets.

India is estimated to have around 12 million retail outlets. The major part of the retail business in
is presently
the country in the hands of unorganized sector. But there will be drastic change in the coming
organized
time. The retail business in India is expected to double in the next 5
years..

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 Figure 12.3 : Percentage Share in Total Retail Sector

This seems true with the announcement of “reliance industries limited”, that it will invest rs 25000
crores over the next few years to create a giant retail network of shops in India. Therefore, it is
sure that there will be drastic shift from unorganized retailing to organized retailing in India in the
near future. The reason is now Indian consumers want more value in terms of convenience,
quality, pleasant shopping environment, financing options and competitive prices.

Some recent trends in retailing are noted below:

I. New retail forms are constantly emerging and are threatening to the established retail
forms II. New retail forms are facing a shortening life span.
III. Popularity of non store retailing is continuously growing.
IV. Competition today is increasingly intertype or between different types of outlets. Thus, we
see competition between store and non store retailer
V. Superpower retailers are emerging who through their superior information systems and
buying power are able to offer strong price saving to consumers.
VI. Specialty stores in malls are becoming increasingly competitive with large department
stores in offering one stop shopping
VII.Marketing channels are increasingly becoming professionally managed and programmed.
As large corporations extend their control over marketing channels, independent small
stores are being squeezed out.
VIII. Retail organizations are increasingly designed and launching new store formats
targeted to differentlifestyle groups. They are not sticking on one format, but are moving
into a mix of businesses that appears promising.
IX. Retail technologies are becoming critically important as competitive tools.
X. Retails with unique formats and strong brand positioning are increasingly moving into
other countries.

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12.5 Creating and Managing Network of Retailers

In most businesses, the individual retail dealer is the pivot in the marketing effort. He is the real
interface between the firm and its customers; it is the retailer’s interaction with the customers that
gives rise to sale. So, the quality of this interactions a key determinant of marketing success; it
will determine the extent to which the effort and the expenditure is incurred by the firm on
promotion is translated into sales. Experiences shows that even after generating good consumer
preference for its brand through effective advertising and promotion, a firm may fail to generate
sales, if its dealers are weak and competitors dealers are strong.

In most cases, the individual’s retailer is a force to reckon within the given locale. He knows the
customers’ needs; he is also in a position to provide the required services. Naturally he is in a
position to influence the decision of the customers. He builds goodwill and also build new
customers for the firm. Infact with his cooperation, a firm can get a continuous stream of
customers at a progressively lesser unit cost.
A retailer is not a mere ‘outlet’; he pays a pivotal role in market penetration, market development,
merchandising and promotion. Especially, as competition gets tougher, it is the retailer who
provides the cutting edge. While earlier there were only few brands in the market for any product
category. This has put the retailers in the forefront of the marketing strategies of the company.
Retailer selection the first task in the process of creating and managing retail network’s firm has to
ensure that those selected for dealership possess certain essential qualifications like expertise or
experience in the line of product, financial capacity and willingness to invest in the line,
creditworthiness, capacity to offer assortments of products and services required by the customers,
and salesmanship form part of common qualifications.
Firms which are well established in the market and those that which possess certain unique
strengths in terms of product, brand, service etc. will enjoy a wider choice when they set out to
appoint retailers. Their reputation and brand equity will pull in large number of applicants who are
above average in the required attributes. In contrast, for the firms yet to be established, the choice
base will be small. Such firms may have to initially accept those who are prepared to take up the
dealership and build a good network over a period of time.
Advertisement will no doubt be of help in this regard. But they must be developed carefully. The
companies and the ad agencies must have the expertise needed for developing effective dealer
recruitment ads.
Induction of the newly selected retailer into the organization is as important as selection of retailer.
Firms striving for a competitive edge in the matter of channel, invariably devote a lot of attention
to dealer induction.

12.6 Wholesaling : Meaning and Types

Wholesaling, jobbing, or distributing is defined as the sale of goods or merchandise to retailers,

to industrial, commercial, institutional, or other professional business users, or to other

167
wholesalers and related subordinated services. In general, it is the sale of goods to anyone other
than a standard consumer.
According to the United Nations Statistics Division, “wholesale” is the resale (sale without
transformation) of new and used goods to retailers, to industrial, commercial, institutional or
professional users, or to other wholesalers, or involves acting as an agent or broker in buying
merchandise for, or selling merchandise to, such persons or companies. Wholesalers frequently
physically assemble sort and grade goods in large lots, break bulk, repack and redistribute in
smaller lots. While wholesalers of most products usually operate from independent premises,
wholesale marketing for foodstuffs can take place at specific wholesale markets where all traders
are congregated.

It is obvious that retailing differs from wholesaling. Actually, two main characteristics distinguish
retailing from wholesaling. First, unlike wholesaling retailing is aimed at the actual or ultimate
consumer. Second, unlike wholesaling, retailing involves selling for personal consumption. A
wholesaler does not sell to the ultimate consumers; or for the personal consumption of the buyer.
Those who buy from the wholesaler are either retailers or institutional buyers; and neither buy for
personal consumption; instead they do it for their business- the retailers’ for reselling and the
institutional buyers for the consumption of their institutions.

Figure 12.1 : Types of Wholesallers

Types of wholesalers: There are mainly four types of wholesalers:

1. Wholesale Merchants-This are the person who buy and sell goods own their own account
and the owner ship of the goods is transferred to them. There are two types of such
merchants. One is full service merchants who provide all the services relating to the
marketing, carry stock and make deliveries.
The other one is limited service wholesalers who provide limited services. Examples-
electrical merchants, hardware merchants, pharmaceutical merchants that sell goods in
particular category only.

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2. Agents and Brokers-This are the persons who buy and sell goods for others on
commission basis. it includes auction companies, agricultural commission merchants.
Manufacturing agents, food brokers, and import-export agents and brokers. They are
organized by a product line and assist in negotiations with the buyers and sellers. They
make their profit by commissions.

3. Manufacturer’s Sale Branches-This are the units which sell good on their own which are
manufactured by them. They are types of factory outlets.

4. Specialized wholesalers-This are a special type of wholesalers which include co-operative

marketing association which mainly trade in grains, livestock, fish, petroleum products etc.

12.7 Marketing Logistics and Supply Chain Management

The supply chain management is essential for companies to improve productivity and reduce
costs. The purpose of marketing logistic is to design and implement infrastructure, which will
deliver goods from the point of origin to point of sell in an effective and least cost manner. This
objective mix of high customer satisfaction and lowest cost possible are asymmetrical. The major
decision involved with marketing logistic relate to order processing, warehousing, inventory and
transportation.
Companies look forward to shortening order to payment cycle. A long cycle will lead to decrease
in customer satisfaction and company’s profit. Companies have to set benchmarks at each level
from sales people receiving orders to receiving payment from creditors. Warehousing for finished
goods is another important hub for companies. There has to be a right balance between sales order
and quantity of finished goods. Warehousing at strategic locations increases timely delivery of
goods and reducing in inventory. Technology has helped in improving warehousing standards.
Piled up inventory is not a good sign for the company. Inventory management involves making
decision with time and quantity of raw materials for matching customer requirements.
Management principle like Just In Time (JIT) are used for better inventory management. In JIT
focus is to develop well time flow of raw materials and finished goods.
Transportation and freight cost plays an important role in final pricing, delivery and condition of
raw materials as well as finished products. Here companies need to make the decision, whether to
use a private carrier (company ownership), contractual (Outside agency) or common carrier
(service shared at standard rates).Retailing, wholesaling and logistic decision are very important to
deliver value to end customers.

12.8 Summary

• Retailing can be defined as the buying and selling of goods and services. It can also be
defined as the timely delivery of goods and services demanded by consumers at prices that
are competitive and affordable.Various forms of retail are convenience stores, multi
brand outlets, hyper marts/ supermarkets, departmental stores, malls, discount stores etc..

• Wholesaling is defined as the sale of goods or merchandise to retailers, to industrial,

commercial, institutional, or other professional business users, or to other wholesalers and

169
 related subordinated services. In general, it is the sale of goods to anyone other than a
standard consumer.

• Types of wholesalers are wholesale merchants, agents and brokers, manufacturer’s sales
branches and specialized wholesaler.

12.9 Self Assessment Questions

1. What do you mean by retailing?

2. Elaborate the types of retailing going on in India with examples.

3. Differentiate between wholesaling and retailing.

4. Write a short note on retail scenario in India.

5. What do you mean by marketing logistics?

6. Explain the concept of creating and managing network of retailers.

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12.10Reference Books

- V.S.Ramaswamy, S Namakumari(2009); Marketing Management; MacMillan,

- S.A Sherlekar (14th edition); Marketing Management; Himalaya Publishing House,

Mumbai.

- Michael.J.Etzel, Ajay Pandit, Bruce.J.Walker, William.J.Stanton (13 th Edition),

Marketing Concepts and Cases; Tata McGraw hill Companies, New Delhi.

- James.R.Ogden, Denise.T.Ogden (2008); Integrated Retail Management; Biztantra,

New Delhi.

- Biplab.S.Bose,(2007); Marketing Management; Himalaya Publishing House,

Mumbai

- Kothari, Mehta, Sharma (2009); Marketing Management; RBD Publications, Jaipur

- Phillip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha,12 th edition,
Marketing Management; Pearson Prentice Hall; New Delhi.

171
 Unit - 13 : Marketing Communication

Structure of Unit:

13.0 Objectives
13.1 Introduction
13.2 Objectives and Role of Marketing Communication
13.3 Process of Marketing Communication
13.4 Barriers to Marketing Communication
13.5 Developing Effective Marketing Communication
13.6 Integrated Marketing Communication
13.7 Summary
13.8 Self Assessment Questions
13.9 Reference Books

13.0 Objectives

After completing this unit you would be able to understand the

• Conceptual framework of marketing communication

• Ways of minimizing barriers to communication
• Need for an integrated marketing communication programme
• Concept of synergy, and
• The role of effective communication

13.1 Introduction

An individual, work groups or organizations can rarely succeed without being effective
communicators. Bits and pieces of messages have no relevance unless they reach someone who
perceives their significance. The aim of communication is to create an understanding in the minds
of others. Marketing communication is the presentation of messages to the target market. Thus it
is concerned with telling the target market about the ‘right’ product.
In today’s highly competitive and dynamic environment the age old saying “ what is seen and
heard sells best” still holds. With the changed face of the market in this ever dynamic
environment, the nature of competition has changed from stand alone competitors to retail chains
and from simple promotion tools like advertising to interactive websites.
Marketing communication is the voice of the marketer and is a means by which a dialogue can
be established and a relationship can be built between the seller and the buyer. In the realm of
marketing strategy that revolves around the product, pricing, place and promotion, marketing
communication or promotion have a significant role to play.

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 Media Advertising Event Marketing And Sponsorship
TV Sports
Radio Arts
Newspaper Entertainment
Magazines Cause related

Consumer Promotions Trade Promotions

Samples Trade deals and buying allowances
Coupons Point of purchase display allowances
Premiums Contests and dealer incentives
Refunds and rebates Traaining programmmes
Contests trade shows
Direct Response Advertising Cooperative advertising
Mail
Telephone Consumer Promotions
Broadcast media Samples
Print media Coupons
Online Advertising Premiums
Web sites Refunds and rebates
Interactive ads and emails Contests
Place Advertising Trade Promotions
Posters and hoardings Trade deals and buying allowances
Movie theatres and lounges Point of purchase display allowances
Point of purchase Contests and dealer incentives
Product placement
Point Of Purchase Advertising Publicity And Public Relations
Shelf talkers Personal Selling
Aisle markers
Shopping cart ads
In store radio or TV
Traaining programmmes

Figure 13.1 : Marketing Communication Options

Source : Keller, Strategic Brand Management, 3e, p230
All products do not talk; the marketing communication breathes life into products giving them the
power of speech. It has become imperative for the marketer to meet the challenge of getting the
attention of the potential customer amidst all the noise and information overload that bombards
the consumers in the form of marketing communication.
For new and unfamiliar products, all marketing communication must work to generate awareness,
stimulate trial and build primary demand.. For products that have been in the market for some
time, the marketing communication is aimed at giving the target market a reason to buy over and
above competing products.
Marketing communication can be specifically designed to tackle marketing area problems like
sagging profits or declining market share.

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Phillips India, the eighty year old arm of Netherlands based Koninlkijke Phillips Electronics NV,
is facing intense competition from local and foreign manufacturers ( mainly Korean and Chinese)
their sales falling from € 26.3 billion in 2008 to € 23.1 billion in 2009.
Phillips India has designed a new marketing communication programme to change the story, their
tagline being “Simply making a difference to people’s lives.” They have for the first time in
eighty year history appointed brand ambassadors, John Abraham for its personal care products and
musical trio Shankar, Ehsan, Loy for its lifestyle products. And the marketing communication
says, “Phillips products have sophisticated global technology at a price suited for all.

13.2 Objectives and Role of Marketing Communication

All communication has one and only one objective; that is to create an understanding in the minds
of others. The broad objective of all marketing communication is to inform, persuade and remind
customers about products and brands giving them reason to buy. The objectives can be broadly
classified as under
• To enhance organizational effectiveness
• To improve competitive position
• To generate greater profits
These objectives lead to the formulation of the communication strategy of an organization.
Marketing communication can be conducted at two distinct levels
• Corporate level
• Product level
Marketing communication at the corporate level is designed to address not just the ultimate
consumer but all the stakeholders. ( Stake holders are elements that have critical interest in an
impact on the organization’s performance namely employees, suppliers, banks, distributers, stock
holders.) Such communication is aimed at enhancing the company’s image in the mind of the
stakeholders.
At the product level, the role is related to improving market share, create competitive advantage,
create favourable climate for marketing activities, improve brand recognition and inform and
educate the market about product availability, usage of product, source of product, who the
product is meant for and any rewards for using the product.
Further to the objectives of marketing communication, the roles played by it can be varied
depending on the objective in focus. The role played by marketing communication has become
phenomenally significant due to the advent of the ‘information age.’ Today the markets are
characterized by heightened competition and plenty of growth opportunities. Marketers are
therefore relying heavily on marketing communication to take advantage of the growth
opportunities and standout in the competitive scenario.
This can be looked at from the following perspectives.
A. From the Consumer Perspective

• Identify the source or maker of the product

• Lower search cost and time for finding desirable products
• Reduce dependence on marketing intermediaries
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 • Estimate the product quality
B. From the Organization Perspective

• Build the company image

• Convey values of the organization
• Inform, persuade and remind customers about products, services, ideas
• Create perceived differences between competing products
Promotion Strategy and its Marketing Implication

Marketing communications play an important role in the promotion strategy. The form of
communication differs depending on the nature of product and its stage in the product life cycle.
For new products the objective is to generate awareness, stimulate trial and build primary demand.
This calls for high advertising

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and sales promotion expenditure. For example free packets of the recently launched Knorr Soupy
Noodles were distributed with the already popular Knorr soups to induce trial.
On the other hand, in the case of established products the focus is on retaining loyal customers
and providing good service. This can be better achieved by an extensive, well trained and well
supported sales force particularly in the case of industrial goods and services.
In case of FMCG and low unit price products, price is a major deciding factor for the consumer.
Hence it makes sense to have a low promotional budget and play on volumes so as to generate a
higher return on investment rather than spending heavily on advertising, sales promotion or
maintained a trained and qualified sales force.
Adapted from Walker et al, Marketing Strategy 5e, Tata McGraw Hill

13.3 Process of Marketing Communication

The process adopted for achieving the objective of marketing communication, that is creating a
desired understanding in the mind of the consumer, is the transmission of a message from the
sender to the receiver through an appropriate media, notwithstanding the occurrence of noise or
distortion.
For designing and implementing promotional campaigns, we need to understand the
communication process. In today’s context of a highly competitive marketing environment, it is
not only important to make a good product; instead it is imperative that the marketer
communicates about this product with the target market, that is, the people for whom this product
is designed. This communication also generates feedback that can be used to bring about
improvement in the product.
The different elements in the communication model are as under:

 The Sender /Source

This is the point of origin of the communication which may be an individual or a group with an
objective to be achieved, which is the reason for the communication. In the context of marketing
communication, this role is played by the marketer.

The Encoder
The content of the communication is expressed in the form of an encoded message . Encoding
involves transforming the message into some language or code understandable by the receiver.

The Message
The message is the subject matter of the communication. What is the communication all about. It is
the information content that the sender wants to send to the receiver.

The Channel
The communication can be best facilitated through a particular media which is the channel of
communication. Face to face communication, telephone calls, letters, emails, print material,
conferences, advertising, hoardings and billboards , newspapers and magazines, television and
radio are all examples of channels of communication.

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The Decoder
The decoder is used by the receiver to retranslate the message for the purpose of understanding
and is complimentary to the encoding element. It involves translation or transformation of the
message into an understandable language.

 The Receiver
The sender intends to send the message to someone in particular. This intended target of the
marketing communication is the receiver. The receiver must receive , interpret, understand and
respond to the message.

Response and Feedback

The communication process remains incomplete without adequate response or feedback. Receiving
feedback helps the sender in judging whether the communication has been received as intended.

Noise
Noise is primarily considered as mechanical variation in the communication channel or an error in
the transmission of information.
The communication may be misunderstood or misinterpreted due to several other factors which
may be in the environment or within the sender and/or receiver. All of these constitute as barriers
to communication.
For example

• A talkative person sitting ahead of you in a cinema hall/ theatre

• Faded ink in a print out
• Attitude towards the sender
• Selective hearing
• Use of inappropriate language while coding
As is evident from the above examples, the sources of noise can be classified into categories namely;
mechanical or semantic difference in the meaning of words and their interpretation.
Language problems in communication:

“Please leave your values at the desk” Signboard communication in a Paris hotel where French is
the major language of communication
“Drop your trousers here for best results” - Bangkok laundry. Signboard communication in a
laundry in Bangkok where people speak Chinese predominantly but the population is cosmopolitan.

13.4 Barriers to Marketing Communication

The chief aim of communication is to influence others by conveying meanings that will be
understood and accepted by the receiver. When communication is impeded and does not reach the
receiver as intended, the communication is considered ineffective and the impediments are known
as barriers. These give rise to several problems in communication.
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Often communication problems are symptoms of more deeply rooted problems; for example it
may be a poorly designed organization structure, or unclear and ill-defined organizational goals,
vague performance standards etc. The problems may also be a creation of the personnel in the
organization.

Attempts have been made to classify these barriers in order to understand their nature and causes
and to help rectify them. Harold Sterglitz in his research paper ‘Barriers to communication’ has
classified them into three categories.

• Barriers arising from the fact that individuals are involved in communication who come from
different backgrounds.
For example, it is extremely difficult to establish meaningful communication between a
member of upper middle class and a slum dweller because their social backgrounds are
phenomenally different.  Barriers arising from organisation’s climate that tends to stultify
communication.

For example, autocratic leadership style of a team leader or lack of an integrated marketing
communication programme.

• Others: There are several other factors that cannot be classified in the above two categories.
These arise out of geographical distances, lack of global mindset, lack of time and lack of
training etc.

Harold Zelko, in his book ‘Successful Conference and Discussion Techniques’ has given the
following barriers to Communication.

Table 13.1 : Barriers to Communication

Speaker should Barriers Listener should

1 Different status, Think in terms of

Speak at level of listeners
position, self speakers’ status and
status, interests and
experiences experience

Adopt to listeners
2 Prejudices Dispel prejudices
prejudices

Use common ground and ‘I’ versus ‘You’

3 Develop ‘You’
‘You’ attitude attitude

Make changes seem Resistence to

4 Be open minded
attractive change

5 Listen in order to
Organise clearly for Refute rather than
understand rather than
understanding understand
refute

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 Develop ideas for Lack of listening
6
listeners’ interest skills Use listening constructively

Use listener level

7 Language
language Analyze speaker’s laguage

A more complete classification of barriers to marketing communication is as follows :

Barriers of Marketing Communication
A. Organisational
a) Organisational Policy
b) Lack of sound objectives
c) Complexity in organization structure
d) Authority responsibility relationships
e) Organisational rules and regulations
B. External

a) Semantic
i. Badly expressed
messageii. Faulty
translations iii. Unclarified
assumptions iv. Gesture
decoding
v. Specialist’s language vi. Channel
message incompatibility

b) Technical
i. Channel
distortionsii. Physical
barriers iii. Mechanical
failures iv. Time lag
c) Pshychological
i. Inattentionii. Loss
during transmission iii.
Poor retention iv. Distrust
of communicator v. Interest
and attitudes
C. Personal
a) In Sender
i. Ignoring
communicationii. Lack of
awareness iii. Attitudinal
problem iv. Fear of criticism
b) In Receiver

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 i. Receiver
disinterest/Unwillingii.
Receiver distractions iii.
Lack of motivation iv.
Prejudices
People (receivers) inject their own value systems into what they see, hear or read while decoding
communication messages and lose rationality either because they do not agree with what is being
said or they have mentally stereotyped the sender by perceiving the message to be different from
the way it was intended. Consequently the receiver hears only what he expects to hear.
Since marketing communication is eventually an exchange of views/thoughts between two parties
that is the sender marketer and the receiver consumer, the communication must overcome all
barriers and be effective in the best interest of both. (Please refer to section 1.2 Objective and role
of Marketing Communication)
Consumer judgements impacted with prejudices are the cause of many a communication
debacles. In India, cake soaps and bars were thought to be cheaper and detergent powders were
blindly believed to be expensive and out of reach of the common man. Such a prejudice was
affecting the detergent market until Nirma happened. Other low cost powders including Wheel,
Hippolin, and Tide have benefitted after Nirma broke the prejudice.

13.5 Developing Effective Marketing Communication

Can you imagine a cooking oil that assures a healthy heart? Maybe your answer would be yes
after the highly successful and effective marketing communication campaign of Saffola. “Saffola
was launched on the heart platform. Saffola has also built some additional equity around its
Healthy Heart Foundation formed with the objective of educating people about heart care. It also
has its Web site (healthykhana.com) to propagate the virtues of the Saffola brand. This is great
example of how an effective marketing communication is.

Developing effective marketing communication is the responsibility of not only the top
management but also all people associated with various attributes of the product like its
branding, packaging, warranty, after sales service, product quality etc. The communication must
be designed with the target audience in mind. Once the target audience is identified, the marketer
needs to determine the communication objective which may be to inform or to persuade the
prospective buyer. With the objective set, the next step is to design the marketing communication.
Here it needs to be decided what to say, how to say and who should say it. After this the
appropriate communication channel is selected which may be personal with direct communication
or non personal. Having selected an appropriate channel, the budget for the marketing
communication programme must be worked upon. A cost benefit analysis keeping in mind the
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organization’s market share, type of market ( business or consumer), buyer’s readiness stage and
stage of product in its life cycle. It then is important to decide on the appropriate combination of
the marketing communication mix i.e. advertising, personal selling, sales promotion, publicity
and direct marketing. The marketing communication can now be transmitted so as to reach the
target audience.
The results of the communication programme must be measured and then only can the marketer
evaluate it success and recover the communication investment. A good marketing
communication should define the target market and also clarify what is unique about the product,
service, idea, personality or place being marketed.
The marketer should communicate factual, verifiable evidence so that the target market actually
believes the communication content and the desired associations.
Table 13.2 Steps for Developing Effective Marketing Communication
Identify the target audience
Determine the communication objectives
Design the communication
Select the communication channel
Establish the total marketing communication budget
Decide on the marketing communication mix
Measure the communication results
Manage integrated marketing communication
Essentials for an effective marketing communication message
• The message must cater to some need in the target audience and suggest some way to meet
that need.
• Message must be designed and delivered so as to gain the attention of the target audience.
• Message must focus on one or two core selling propositions.
• The message must be communicated through an appropriate channel that is compatible with
and reinforces the content of the message
Table 13.3 : Point to Ponder 4: Brand and Marketing Communication
Brand Communicated Benefit
Close-Up Cosmetic, fresh breath
Colgate Taste, decay prevention, bright teeth
Sensodyne Safe on sensitive teeth, therapeutic
Pepsodent Germ fighting, long lasting freshness
Meswak Ayurvedic medicinal properties

The following guidelines can help to overcome barriers and make marketing communication
effective.
Purposeful Planning: The ultimate purpose of marketing communication must always be kept
in mind. Planning should not be done in vacuum Infact the entire marketing team must be
involved and encouraged to participate .

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Recognise that communication is a two-way process : It is very important to know whether the
communication is being properly received and perceived because too often information is
transmitted without communication. This can be done by encouraging action, responses, and
measuring the impact of the marketing communication through recognition and recall tests
conducted on target audience.
Appropriate Media: In order to convey a thought, it has to be coded into some symbols maybe
words, spoken or written or pictures and gestures. The choice of the media and how the message
is conveyed to the receiver influence the reactions of the receiver. The sender must consider the
receiver while deciding on the appropriate media for the marketing communication .
Example : Business class air travel marketing communication can be communicated through a
business magazine or a business television channel.
Optimum Timing: Optimum timing is important in marketing communication . The best time for
marketing communication is when they are competing the least with other situations affecting the
receivers/ target audience. Messages should be so timed that they are received when they are
needed and are not misconstrued as a result of other thoughts in the receivers’ / target audiences’
mind.
Example : A paint product marketing communication in Indian market should ideally be
transmitted after the rainy season . September – October , before the festival of Deepawali as
Hindus do the annual spring cleaning and painting of their houses before this major festival.
Reinforce all marketing communication message with quality products and services. Any
communication that is based on trust and credibility will be accepted by the target market to a greater
extent.
Practice Communication Internally and Externally: Top management must be convinced of
the need of communication, both internal and external. Good communication is good business. It
is not enough that the marketing communication be made externally. All marketing
communication must also be communicated internally in the organization. This will result in the
employees reinforce their words with appropriate action.
One of the best means to give meaning to a message is to act accordingly.

13.6 Integrated Marketing Communication

In the realm of marketing , marketing communication enjoys a central place, because no matter
how good the product is; backed with attractive pricing and fool proof distribution, without the
marketing communication the product will not move from the shelves into the consumers’ world.
The American association of Advertising Agencies defines Integrated Marketing Communication
as a concept of marketing communications planning that recognises the added value of a
comprehensive plan. The strategic role of the various communications disciplines ( general
advertising, direct selling, sales promotion and public relations) is evaluated and combined to
provide clarity, consistency and maximum impact to create the most effective and efficient
marketing communication programme.

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Each communication option can be judged in terms of effectiveness and efficiency by which it
affects the prospective buyer and the an appropriate mix of these options can be chosen where
each component plays a specific role in promoting the desired product or service.
Concept of Synergy: The integrated marketing programme should be put together in such a way
that the whole is greater than the sum of the parts. This implies that the use of more than one
communication discipline would enhance the impact of the other discipline.
Criteria for Integrated Marketing Communication Programme.

 Coverage: Proportion of audience reached by each communication option.

Target audience Coverage

Target audience

Coverage

Figure 13.3

• Contribution: Inherent ability of a marketing communication to create the desired

response and communication effect from the consumers in the absence of exposure to any
other communication programme.
For example if the desired response is an immediate increase in sales figures then Sales
promotion has a higher contribution where as if the desired response is to inform leading
to increased awareness , Advertising would fit the bill.

• Commonality: Commonality is the extent to which common information conveyed by

different communication options shares meaning across communication options. For
example Eureka Forbes uses direct selling and advertising where the role of the salesman
is shown as customer friendly advisor explaining health benefits in order to convey that
their product Aqua Guard is a user friendly product leading to better health.

• Complementarily: It describes the extent to which different associations and linkages are
emphasized across communication options. All chosen options should reinforce the
desired consumer knowledge structures.

• Versatility: It refers to the extent that a marketing communication option is effective for
different groups of consumers. For example the Maggi campaign ‘Me and meri Maggi’
covers consumers across various age groups including children, young adults, middle-aged
and older consumers.

• Cost: Any investment in the marketing communication must be weighed against their
cost in order to arrive at the most effective and efficient marketing communication
programme.

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13.7 Summary

Marketing communication has a very important role to play in the execution of marketing
strategy. The objective of marketing communication is to inform, persuade and remind
customers about products and brands giving them reason to buy. The marketing communication
process is a seven stage process that is designed to create an understanding in the mind of the
prospective buyer. Noise impacts the communication process in a negative manner and must be
curtailed in order to get desired results.
The barriers to marketing communication are impediments that affect the smooth flow of
communication. Most of these barriers can be handled with a sound marketing communication
planning programme. With proper planning and scheduling the marketing communication
programme can be made flawless and effective.
Integrated marketing communication infuses the marketing communication programme with added
effectiveness and uses the concept of synergy to provide better results.
The marketing communication plays a vital role in communicating the positioning of the product
to its customers and other stake holders . The other elements of the marketing mix work in
tandem to reinforce this position. Effective marketing communication communicates to the
prospective buyers the availability of the product, informs about the features and price , helps
customers form an opinion about the product quality and finally make a better evaluation of
alternatives in order to make a informed and well researched decision.
13.8 Self Assessment Questions
1. Discuss the role and objectives of marketing communication in detail.

2. What are the prime considerations in developing effective marketing communication?

3. Discuss the barriers to marketing communication.
4. Marketing communication should only promise what can be delivered. Comment on the
statement.

5. Why is marketing communication a significant part of marketing strategy ?

6. If you were the Head of Marketing at an Industrial product manufacturing company and
you were to choose between focusing your marketing communication programme on
either the corporate platform of the product route, which would you choose. Give reasons
for your answer.
7. What are the various elements of the marketing communication process?
8. What significance does feedback have in the communication process and how is this
applicable in the case of marketing communication?

13.9 Reference Books

- V.S.Ramaswamy, S Namakumari(2009); Marketing Management; MacMillan,

- S.A Sherlekar (14th edition); Marketing Management; Himalaya Publishing House,

Mumbai.

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- Michael.J.Etzel, Ajay Pandit, Bruce.J.Walker, William.J.Stanton (13 th Edition),
Marketing Concepts and Cases; Tata McGraw hill Companies, New Delhi.

- James.R.Ogden, Denise.T.Ogden (2008); Integrated Retail Management; Biztantra,

New Delhi.

- Biplab.S.Bose,(2007); Marketing Management; Himalaya Publishing House, Mumbai

- Kothari, Mehta, Sharma (2009); Marketing Management; RBD Publications, Jaipur

- Phillip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha,12 th edition,
Marketing Management; Pearson Prentice Hall; New Delhi.

Unit - 14 : Promotion Mix and Advertising

Structure of Unit:

14.0 Objectives
14.1 Introduction : Meaning and Definition
14.2 Components of Promotion Mix
14.3 Factors Affecting Promotion Mix
14.4 Process of Determining Promotion Mix
14.5 Advertising: Meaning Five M’s Decisions
14.6 Definition and Characteristics of Advertising
14.7 Objectives of Advertising
14.8 Importance and Limitations of Advertising
14.9 Choosing the Advertising Media
14.10 Difference between Advertising and Publicity
14.11 Summary
14.12 Self Assessment Questions
14.13 Reference Books

14.0 Objectives

After completing this unit, you would be able to:

• Understand the conceptual framework of promotion mix and advertising

• Learn about the elements of the promotion mix and their relative merits and demerits
• Imbibe the selection process of the elements of the promotion mix
• Learn and appreciate the fascinating world of advertising and its pitfalls

14.1 Introduction : Meaning and Definition

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Promotion plays an important role in the economic and social reconstruction of the economy of a
region. The promotion mix is a particular combination of promotional tools used by a firm to
communicate with target audiences. Promotional mix stands for special kinds of promotional
activities namely Advertising, Sales Promotion, Publicity or Public Relations and Personal
Selling. Marketers examine the distinct advantages and costs of each promotion element and the
nature of product and competition, state of readiness of the consumer and stage of product in
product life cycle and accordingly decide on the optimal mix to be used for their marketing.
Just having a good product with attractive pricing and making it easily available to the target
market is not enough. Marketers need to promote their products in an attractive manner and
communicate with all stakeholders so as to increase the desirability of the product as well as
enhance the organisation’s image. No matter how good the product is and how well it is backed
with attractive pricing and fool proof distribution, the product will not move from the shelves into
the consumers’ world unless it is promoted using an appropriate mix of all the elements of the
promotion mix.
Definition : The promotional mix of an organization is a portfolio of promotional tools
employed by it with specific relative emphasis placed on each and having the broad objective of
communicating with the target market.

Promotion mix, also called the communication mix, has four components, namely, Advertising,
Sales Promotion, Personal Selling, Public Relations or Publicity. Some authors also propose the
inclusion of direct marketing as an element of the promotion mix.

14.2 Components of Promotion Mix

The components of the promotion mix (Advertising, Sales Promotion, Personal Selling, Public
Relations or Publicity) are techniques that have unique characteristics and must be used
judiciously keeping in mind the organisation’s promotion objectives.
Before we delve deeper into the individual elements, let us understand that these elements of the
promotion mix can be classified into two categories (i) those that use the personal form of
communication (ii) the others that use non-personal forms. The personal communication channels
derive their effectiveness from personalization and feedback whereas the non-personal
communication channels derive their influence from two-step flow-of-communication process.
I. Advertising: “According to the American Marketing (AMA) Association Advertising is any
paid form of non-personal presentation of ideas, goods or services by an identified sponsor.”
Characteristics of Advertising

• Paid form
• Non personal presentation
• Identified sponsor
• Mass communication tool
• Can be used for ideas, goods or services
• Better control on message and timing
Benefits of Advertising

• Source of information for consumers

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 • Builds the company and brand image
• Stimulates demand
• High effectiveness because of dramatized presentation styles
• Acts as a competitive weapon
• Cost effective for larger audience reach
Limitations of Advertising

• Credibility of the advertising message content is a matter of debate

• Advertisements are not neutral
• Little control over the reach in terms of target audience
II. Sales Promotion: “According to AMA, Sales promotion refers to those marketing activities
other than personal selling, advertising and publicity that stimulate consumer purchasing and
dealer effectiveness such a display shows and exhibitions, demonstrations and various non-
recurrent selling efforts not in the ordinary routine”. Whereas advertising gives a reason to buy,
Sales Promotion gives an incentive to buy.
Characteristics of Sales Promotion

• Economic benefits offered by an organization to buyers or marketing intermediaries.

• Designed to gain the attention of and attract new customers or brand switchers
• Rewards loyal customers
• Increases repeat purchases
• Motivates middlemen to buy and stock more and push sales further
Benefits of Sales Promotion
• Induces trials
• Increases customer loyalty
• Pre-ponement of purchases by customers
• Induces stocking by the trade partners
• Helps in adjusting to short term variations in trade
• Liquidating inventories
Limitations of Sales Promotion
• With too many promotion schemes ‘promotion clutter’ confuses consumers
• Attracts ‘brand switchers’ and ‘deal prone’ customers which is not good for the
organization in the long run
• Dilutes brand equity
• Lowers margins
• Expensive and wasteful, when not handled properly
III. Public Relations or Publicity: Publicity is the form of promotion composed of newsworthy
messages sent by marketer or media at no charge to the organization. Public relations activities
promote or protect the image of a firm or product and involve a variety of programmes to
promote or protect a company’s image or products. They cover Media relations, Product publicity,
Corporate communications, Lobbying and Counselling.

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Benefits of Publicity
• Lends credibility to the promotion content
• Can reach a large mass of audience
• Building awareness
• Building credibility
• Stimulate sales force and dealers
• Holds down promotion costs
Limitations of Publicity
• Low control over content by organization
• Can be negative
• PR is difficult to measure, but if consistently pursued with, it can have tremendous
synergy with advertising and sales promotion, thereby reducing overall promotion costs
From the marketer’s perspective, publicity helps in several ways:
• Assisting in new product launches
• Assisting in repositioning of product
• Building interest in product category
• Influencing specific target groups
• Defending products that have encountered public problems
• Building corporate image that rubs off on the products
IV. Direct Marketing: It is the promotion tool for specific customers and prospects achieved
directly by the use of Internet, mail, telephone or any other means like telemarketing.

Characteristics of Direct Marketing

• Direct marketing uses consumer-direct channels to reach and deliver offerings to
consumers without intermediaries.
• Direct marketing is customized and offers consumers key benefits.
• Consumes less time in message preparation
• Firms are recognizing the importance of integrated direct marketing efforts.
The tools that may be used for direct marketing include Face-to-face selling, Direct mail, Catalog
marketing, Telemarketing, Direct-response TV marketing, Kiosk marketing and E-marketing.
Benefits of Direct Marketing
• Consumes less time
• The communication can be interactive
• Lower overheads
• Greater control by marketer
Limitations of Direct Marketing
 There are apparently no disadvantages of direct marketing.

14.3 Factors Affecting Promotion Mix

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In this section we will look at the factors that affect the choice of each of the elements of the
promotion mix in the recipe for success of a promotional strategy. The factors can be classified
under the following categories.
A. Characteristics of the Product
B. Nature of Target Market
C. Type of Organization
D. External Environmental Factors
E. Contingency Factors
A. Characteristics of the Product
a) Nature of the Product: Technology based products are better sold through personal
selling for example Bharat Heavy Electricals Ltd. ( BHEL) promotes its turbines through
personal selling. If the product is a non technical consumer good, it can well be promoted
through advertising. Products that require installation are also better promoted through
direct selling for example online water purifiers.

Figure 14.1
b) Stage of Product in Its Product Life Cycle: The product life cycle is concerned with
the sales history of a product over a period of time and traverses an introductory stage,
growth stage, maturity and decline stage.
During the introductory phase, promotion expenditures include more of advertising and
sales force ( personal selling) so as to build awareness and induce trial of the new product
specially for small value consumer goods. Advertising is relied on in order to build
awareness. For inducing trial, in store shelf space, samples and coupons and other forms of
heavy sales promotion are used substantially.
The growth period is marked by a sharp increase in sales. Promotion costs including those
on advertising and personal selling concentrate on brand building through unique
positioning. The marketers focus on intensive distribution in order to create and sustain
awareness and interest for products designed for mass markets. Promotion expenses may
be reduced in comparison to the introductory stage due to heavy demand.
In the maturity stage the promotion mix is modified keeping in mind the technology and
competitive status. Media advertising for low per unit price consumer goods is decreased
and in partly substituted by in store promotions including price deals. Channel promotions

190
 in terms of better distribution and intensive distribution is given more importance. The
focus of promotion is to stress brand differences and benefits and the marketers may
increase promotions to encourage switching from competing brands.
The decline stage happens because of technological advancement for example digital
cameras replacing photographic film cameras and changing consumer tastes and
preferences. The organization cuts down on the promotion expenses trying to salvage
whatever profits can be reaped. Focus is less on promotion and more on distribution to
ensure that middlemen continue to keep stocks of the product that is in decline stage. Some
marketers practice selective distribution and the advertising is reduced to levels needed to
retain hard-core loyalists. In the decline stage all promotional activity is reduced to
minimal levels.
c) Product Price: The promotion strategy choice is also affected by the unit price range
of the product in question. Low unit price products are promoted using tools suited for
mass communication. On the other hand the high per unit value products like luxury cars
and diamond jewellery and high value industrial goods are promoted through personal
selling or channel sales with personal support.

B. Nature of Target Market

a) The promotion strategy is affected by the fact that the marketer is operating in a
B2B (businessto-business) or a B2C (business-to-consumer) scenario. In a B2C
situation, the promotion expenditure is heavy and promotional tools of mass
communication with a wider reach like advertising are adopted. In a B2B situation
promotion tools that use personalised communication techniques like personal selling are
preferred over tools of mass communication. This is because each business buyer may
have different characteristics. For example a textile manufacturer selling to garment
manufacturing factories.
b) Geographical Concentration of the Market: If the prospective and existing buyers
are located in scattered geographical positions then personal selling is given preference
over advertising. For example a turbine manufacturer would not incur wasteful
expenditure by advertising for its turbines, rather contact the customers directly and use
personal selling to promote the products.
c) Size of Target Market: The larger the target market the more the use of mass
marketing tools of promotion.
C. Type of Organisation
a) Company Policy on Promotion Strategy: The organisation might be a proponent
of a push strategy or a pull strategy. In a push strategy the manufacturer uses its sales force
and distribution channel partners and their resources to sell products to consumers. In such
a case they use more promotion for the marketing intermediaries and hence concentrate on
sales promotion for marketing intermediaries. In a pull strategy, the manufacturer entices
consumers to seek products from marketing intermediaries, the marketing intermediaries
ordering the manufacturers in return. In the case the promotion mix would have more of
advertising.

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 b) Size of the Firm and Fund Availability : Promotion for a small business is a
challenge because of its limited resources and budget. Large organisations have more
resources in contrast to small organisations. For example Hindustan Unilever’s advertising
expenditure for the year ending December 2008 stood at 6.5% of their sales figure.
( Source: A&M Magazine, March15,2010) However focus on benefit and value
propositions can transform a less known smaller company product into a big brand. For
example Ujala Supreme from Jyothy Laboratories Limited is now a big brand. The
promotion mix of small companies with low budgets has to tread more cautiously in
designing the promotion mix. In terms of reach the unit cost of promotion is largest for
personal selling followed by sales promotion followed by advertising.
Unit Cost of Promotion: PS>SP>Advertising
D. External Environmental Factors
a) Compulsions Enforced By Law of the Land: The legal system applicable in the
country creates boundaries within which the organization must set its promotional
communication. As advertising of alcoholic products is banned in India, firms use
surrogate advertising to promote their products. For example Mcdowell promotes its
product soda sharing the same brand name and aims that the promotion will rub off on the
beverages. In such a case the marketer could preferably use the publicity tool like event
management and sponsorship.
b) Attractiveness of the Industry: In the event of deteriorating attractiveness of the
industry for example toothpowders, the marketer may refrain from advertising and indulge
in sales promotion to harvest whatever is possible from increased sales in a short period of
time. If the sector happens to be a sunrise sector and the market shows potential for high
growth for example that of cellular phones, the marketer would resort to heavy advertising.
E. Contingency Factors
a) Visibility of the Firm: The products of an organization may be such that they are
not consumer goods and moreover due to a product brand nomenclature followed by the
organization, it may have poor visibility in the consumer’s eyes. In such a case
organization would resort to advertising at the corporate level. For example ITC after
diversification into consumer goods makes sure of promoting the product brands along
with the corporate promotion in all its advertisements as in Sunfeast from ITC.
b) Competitor’s Actions: The organization may be forced into altering its promotion
mix to counter the attack from a competitor. Coke and Pepsi are participants of a rather
infamous promotional war. Similarly Rin and Tide have been in battle in the form of
comparative advertising and counterattacks. In such a case a retaliatory promotional
campaign seems to be the only option.
However organizations must exhibit restraint and work ethically.

14.4 Process of Determining Promotion Mix

The promotion mix adopted by a firm is the means by which the firm attempts to inform, persuade
and remind consumer directly or indirectly about the products they sell. Although advertising is a
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central element of a promotion programmes, it is usually not the only element or even the most
important one for the purpose of promotion. Each of the elements of the promotion mix play
different roles in the marketing programme, one important purpose they all serve is to contribute
to increasing product awareness and provide incentive to the prospective buyer towards making
an informal purchase. Determining the promotion mix is a complex task. Keeping in mind the
factors discussed in the above section, every organization allocates the promotional budget
amongst the different elements of the promotion mix. In order to have an effective promotion
strategy, organizations follow the following steps and evolve their promotional strategy.

Review the marketing plan

Conduct a situational analysis

Determine the promotion objectives

Design the promotion communication process

Select the communication channel

Establish the total promotion budget

Decide on the promotion mix

Measure the promotion results

Monitor, evaluate and control the integrated marketing

communication
Figure 14.2 Steps for Developing Effective Promotion Mix

Developing an effective promotion mix in line with the promotional objectives is the dream of
every marketing organization. However the mix once developed need not be frozen and may
evolve to suit changing products and consumer tastes and preferences. The communication must
be designed with the target audience in mind. Once the target audience is identified, the marketer
needs to determine the promotion objective which may be to inform or to persuade the prospective
buyer. With the objective set, the next step is to design the promotion communication. Here it
needs to be decided what to say, how to say and who should say it. After this the appropriate
communication channel is selected which may be personal with direct communication or non
personal.
Having selected an appropriate channel, the budget for the promotion programme must be worked
upon. A cost benefit analysis keeping in mind the organization’s market share, type of market
( business or consumer), buyer’s readiness stage and stage of product in its life cycle. It then is
important to decide on the appropriate combination of the promotion mix i.e. advertising,
personal selling, sales promotion, publicity and direct marketing. The marketing communication
can now be transmitted so as to reach the target audience. The results of the promotion
programme must be measured and then only can the marketer evaluate its success and strive to
recover the promotion investment.

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14.5 Advertising: Meaning and Five M’s Decisions

Meaning: Advertising is any paid form of non personal presentation and promotion of ideas, goods
or services by an identified sponsor.
Advertising is the mainstay of organizations small and big. Organizations advertise their products
to sell them as well as possible, a very difficult job indeed due to recession and cut throat
competition. With the changed face of the market in this ever dynamic environment, the nature of
competition has changed from stand alone competitors to retail chains and from simple promotion
tools like advertising to interactive websites. All products do not talk; advertising breathes life into
products giving them the power of speech and vision. Playing safe is not enough. One needs to
rock the boat and be creative to be able to survive in the long run.
The Five M’s of Advertising
The five M’s are basically the different important decisions that are to be taken while designing the
advertising campaign. The five M’s of advertising are:
Mission: It is the basic objective or goal that any company wants to attain by its advertising
campaign. These could be defined in terms of whether the marketer wants to inform, persuade,
remind or reinforce.
Money: The amount of money that should be spent by the company to achieve the objective of
advertising and the basic factors that should be considered while deciding about the budget of the
advertising. The factors that need to be considered when allocating the budget are stage of
product life cycle, market share and consumer base, competition and clutter, advertising frequency
and product substitutability
Message: The specific information that a company wants to communicate through its advertising,
i.e. what should be the contents of the message. Factors considered when choosing the advertising
message are message generation , message evaluation and selection, message execution and social
responsibility review.

Media: Communication of the message to people requires some media that can be print media,
electronic media or hoardings. Its selection requires certain decisions like selection of type of
media and scheduling of media. Developing media strategy involves deciding on reach,
frequency, and impact, selecting media and vehicles, determining media timing and deciding on
geographical media allocation. Major media types include newspapers, television, direct mail,
radio, magazines, outdoor, yellow pages and other directories, newsletters, brochures, telephone
and internet.

Measurement: It is something related to evaluation of the advertising campaign that can be done
either by considering its impact on sales or profits of the company. Measurement which means
evaluating advertising effectiveness can make use of techniques like communication-effect
research and sales-effect research.

Case study of Sundrop Campaign and the 5 M’s

Mission: Sales goals: Leadership in the edible refined oil segment Advertising Goals:
Communication task was to position Sundrop as the healthy oil for healthy people and ensure that

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this did not erode the delivery of the taste benefit. Positioning had to be perceptually far away
from that of Saffola The cooking oil communication would have a young, modern and premium
feel. Execution had to be distinct and original to stand out from the clutter of cooking oils.

Money: Stage in Product life cycle was introductory, therefore relatively a large expenditure had
to be incurred on the promotional campaign. Also because in competition Sundrop had Saffola
containing Safflower oil which also used the health platform but was associated with heart patients
and less taste. Flora and Sunola using Sunflower oils were also competitors for Sundrop. The
money budgeted had to be allotted keeping in mind competitor promotion.
Message: Health was chosen as the platform, along with a supporting claim for taste. People who
were healthy and energetic were concerned about the long-term prospects of their health. Thus
‘Health’ became the core platform on which the message would be designed. The message was
related to maintenance of good health and was applicable to all members of the family who would
be characterized by lively energetic people. Thus the message and the positioning became ‘The
Healthy Oil for Healthy People.’
Media: Primary media chosen was a television commercial of a 30 seconds duration. A print
advertisement was also released.
Measurement: Within 6 months, Sundrop became the largest selling refined sunflower oil.
Sundrop was able to redefine the category and expand the Sunflower oil segment from 2.71% to
23% in 6 months, and further to 42% in 1997. Sundrop is still the largest selling sunflower oil
brand and holds 15% of branded oil market.

14.6 Definition and Characteristics of Advertising

The American Marketing Association has defined advertising as any paid form of non-personal
presentation and promotion of ideas, goods or services by an identified sponsor intended to lead
to sales immediately or eventually.
According ot R H Colley, ‘Advertising is mass period communication, the ultimate purpose of
which is to impart information, develop attitudes and induce action beneficial to the advertiser
(generally the sales of a product or service).
In the words of W.J.Stanton, “Advertising consists of all the activities involved in presenting to
a group, a non-personal, oral or visual, openly sponsored message regarding a product, service or
an idea; this message called an advertisement is disseminated through one or more media and is
paid for by an identified sponsor.”
Characteristics of Advertising:
Advertisements are believed to have created a consumerists society that defies the very logic that
needs cannot be created. Marketers are credited with the allegation that they use advertising just to
make the fast buck which is a pressing need of the hour in the current times of heightened
competition.
However every coin has two sides. Before we look at the importance and limitations of
advertising we will discuss the characteristics of this magical word advertising. Advertising is
paid for by the marketer. The presentation of the advertisement uses the form of non personal
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presentation as the advertisement is transmitted through a media and not an individual directly
facing the target audience. The sponsor of the advertisement is an identified sponsor and since
many people can be communicated with simultaneously, it is a mass communication tool.
Advertising can be used for ideas, goods or services and is therefore widely used to spread ideas
also. For example the idea of protecting children from preventable diseases through immunization
is widely advertised for on television by the health ministry in India.
As there is a proper media like electronic or print media that is invariably used for advertising,
there is better control on message and timing of the communication. All advertising is not
neutral and unbiased as it is intended to serve the advertiser’s interest in some way.

14.7 Objectives of Advertising

Just as the marketing strategy defines the promotional objectives, similarly the promotional
objectives further define the advertising objectives and the role that advertising will play in the
organisation’s promotional plan.

What are the objectives of advertising? Obviously the ultimate objective is to help produce sales.
But all advertising is not, should not, and cannot be designed to produce immediate purchases on
the part of all who are exposed to it. Immediate sales results (even if measurable) are, at best, an
incomplete criterion of advertising effectiveness. In other words, the effects of much advertising
are “long-term.” This is sometimes taken to imply that all one can really do is wait and see
ultimately the campaign will or will not produce the desired results.

Planning the advertising includes formulating the advertising objectives. Advertising objectives
help the organization formulate what the company wants its target customers to think, feel and act
on exposure to the advertisement. It is the well defined objective that helps the organization to
take all decisions regarding the advertisement campaign effectively. These objectives serve as a
point of reference for the purpose of better control on the advertising campaign such that they
form the basis for evaluating the results of the advertising campaign. The objectives also help to
integrate advertising with other elements of the promotion mix and serve as a basis for deciding
on the advertising budget.

Like the other company objectives, advertising objectives must be tough but achievable. They
must be tough so as to provide the basis for planning and coordination as well as for motivation of
the personnel. They must also be achievable because if stated objectives are not realistically
achievable, it leads to frustration or indifference.

Corkindale and Kennedy have defined advertising objectives using five key words:

• What : What role is advertising expected to play in the total marketing effort?
• Why : Why is it believed that advertising can achieve this role?
• Who : Who is to set the objectives, who will be responsible in translating objectives
into action, who will do the evaluation, who is the target audience?
• How : How will the advertising objectives be put into practice?

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 • When : When will the advertising programme be implemented and when are the results
expected?

Advertising objectives follow a hierarchy sucvh that the goals of each subunit contribute to the
aims of the larger unit of which it is a part.
Broad Objectives Related to the Organisation
Specific Objectives Related to Marketing Department
Sub Objectives Related to Sales or consumer response
Figure 14.3

Broad Objectives

1. To enhance organizational effectiveness

2. To generate greater profits
3. To improve competitive position
Specific Objectives

1. To increase sales
2. To increase market share
3. To increase level of awareness about a product, service or idea
4. To generate responses
Sub Objectives

1. To convey information
2. To create desire
3. To persuade to purchase
4. To offset any negative effects of organizational policies
Advertising objectives are usually very clearly defined as having specific communication
objectives of informing, persuading, promoting action or reinforcing to maintain customer loyalty.
In line with the above mentioned communication objectives the advertising can be termed as
informative advertising, persuasive advertising, comparative advertising and reminder advertising.
Above all the advertising objective that motivates every advertiser is the sales objective. Marketers
hope that the advertising should act a trigger and generate immediate response in terms of higher
sales volumes.

14.8 Importance and Limitations of Advertising

Advertising of late has created such a consumerist society that more harm is done than good for
not only the present generation but for generations to come, just to make that fast buck which is
the pressing need of the hour. The only benefit that advertising agencies coming up with
increasingly annoying stuff is that they have put you off the idiot box for good. This is what an
advertising critic would have to say.

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On the contrary, other well wishers of advertising have said that advertising is a tool for consumer
welfare by encouraging competition leading to improvements in product quality and reduction in
prices for the consumer.
Advertising is both a business and a social force and affects everyone in the society. It is therefore
the bounden duty of one and all involved with the advertising world whether it is the print media
or the visual world, to act and create a society that is built on value.
Advertising is important for the marketers, marketing intermediaries, sales force, consumers and
the society in several ways.

• Builds the company image

• Creates the brand and enhances the brand
• Stimulates demand
• Acts as a competitive weapon
• Increases turnover
• Increases market share
• Helps explore new markets
• Cost effective for larger audience reach
• Maintains prices specially in retail trade
• Gives a platform to sales people
• In stills drive and confidence in the sales force
• Source of information for consumers
• Saves consumer time and effort
• High effectiveness because of dramatized presentation styles
• Creates employment opportunities
• Uplifts living standards
Advertising is no magical wand that can perform miracles. Its contribution is plagued by several
limitations and the effectiveness of advertising depends on the occurrence of certain favourable
conditions. Advertising is effective in times of economic affluence when money is plentiful, but
not so effective in times of a recession. Advertising cannot change a product but can alter the
perception of a product. The limitations of advertising are:
• Credibility of the advertising message content is a matter of debate
• Advertisements are not neutral
• Little control over the reach in terms of who is actually viewing the advertisement
• Lack of flexibility and cannot be moulded to suit individual customers
• Advertisements are unbelievable and show unrealistic results
• Advertising poses a financial burden on small manufacturers as it is costly
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What is the most significant limitation of advertising is that it is extremely difficult to measure the
exact sales effect of advertising expenditure. This is because sales figures of an organization are
dependent on several variables like level of competitive activity, economic scenario, stage of
product in PLC, product quality, price, packaging, distribution, technology, advertising and
promotion, personal selling and consumer tastes and preferences. Isolating the sales effect of
advertising is practically difficult to achieve.

14.9 Choosing the Advertising Media

Different advertising media clearly have different strengths and therefore each is suited to play
specific roles in the communication programme of an organization. The organization may choose
a single medium or select a combination depending upon the audience it wants to reach and the
frequency it chooses to operate on. The variety of media choices and their increased costs have
made the task of the media planners more difficult. Mass media options like newspapers,
magazines and television have the advantage of low cost per exposure. Internet advertising is a
reality and offers the advantage of being interactive. Magazines can convey detailed information
and remain with the viewer for a long time. However choosing between alternatives is a complex
task because it involves making further choice between alternatives within the same medium. For
example, if the advertiser chooses to advertise on television, he needs to choose between the news
and information channels, entertainment channels and music channels. Further he needs to decide
the exact programmes during which he wishes to telecast the advertisement. The following figure
summarizes the advantages and disadvantages of the main advertising media.

Table 14.1 : Advertising Media : Advantages and Disadvantages

Medium Advantages Disadvantages

Television Mass coverage Short message life

High reach High absolute cost
Collective impact of sound, sight High production cost
and motion
High prestige High clutter
Low cost per exposure
Attention getting
Favourable image
Radio Low cost Audio only
High frequency Low attention catching capacity
Flexible Clutter
Well segmented audience
Magazines Segmentation potential Visual only
Quality reproduction Long lead time
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 High information content Lack of flexibility
Longevity
Multiple readers
Newspapers High coverage Short life
Low cost Clutter
Short lead time Poor production quality
Ads can be placed in interest Low attention getting capabilities
sections for better reach
Direct response High selectivity High cost per contact
High information content Poor image
Opportunity for repeat exposure clutter
Reader controls the exposure

Interactive Customized and personalized Non obtrusive

In depth information Often lacks emotionality
Can be engaging

Outdoor Location specific Poor image

High repetition Local restrictions
Easily noticed Short ad
Source : Belch and Belch, Introduction to Advertising and Promotion, 3rd ed.

14.10 Difference between Advertising and Publicity

Advertising and publicity are both elements of the communication or promotion mix and have the
objective of conveying information about products, services or ideas. In common parlance the
words advertising and publicity are used interchangeably but marketing professionals distinguish
between the two in terms of their impact and appropriateness of use.
Table 14.2 : Difference between Advertising and Publicity

Basis of Differentiation Advertising Publicity

Objective Informative and persuasive Informative only
Message Loud Subdued
Style Commercial
Frequency Repetitive Usually one time
Credibility Low High
Sponsor Identified May not be identified
Expense Paid for by marketer Not paid for by marketer
Message control By sponsor By media
Cost Expensive Inexpensive
Time frame of effect Long term Not so long
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Publicity is communication in the form of a news story in order to inform and create favourable
relations with all stakeholders. It may take the form of a news release, featured article, captioned
photograph or press conferences. Publicity has a distinct advantage as it usually is able to reach
people that avoid advertisements in this age of remote controlled televisions and selective
attention to all that is printed in newspapers and magazines.
Cash study: Ethics in Advertising
John Wanamaker, who at times is called the father o f modern advertising and who had built his
business on values, and whose retail business grew into one of the world’s first department
stores, instilled in his employees the attitude of utmost honesty. Once when he reduced the price
of his neckties to twenty five cents, the marketer asked him if the ties were any good. The necktie
advertisement was finally written as , “They are not good as they look but they are good enough
at twenty five cents. The ties sold like hotcakes. As the writer Isaac Asimov puts it : “I don’t
subscribe to the thesis, ‘Let the buyer beware,’ but I prefer the disregarded one, ‘Let the seller be
honest.”

14.11 Summary

The chapter has provided the conceptual framework of the promotion mix and its constituents and
has discussed in detail the hugely important element in the mix that is advertising. The
characteristics, benefits and limitations of each of the elements of the promotion mix have been
discussed so decipher their utility, effectiveness, efficiency and appropriateness for achieving
specific communication objectives. It is important to deploy a mix of different communication
options, each playing a specific role in marketing communication of an organization. The chapter
further discusses the factors that affect the choice of elements of the promotion mix including
characteristics of the product, nature of target market, type of organization and other external
environmental factors and the process of determining the promotion mix.
The chapter further discusses advertising and the five M decisions related to mission, money,
message, media and measurement. Advertising may have a basic objective of increasing the sales
figures but the other broad and sub objectives like enhancing corporate effectiveness have been
discussed. Just like any other tool, advertising also suffers with certain limitations in addition to
having its benefits.
The choice of the advertising media with advantages and limitations of the various media like
television, magazines, internet, and outdoor media has been discussed. Advertising and publicity
have been distinguished on various parameters.

14.12 Self Assessment Questions

1. Define and explain the promotion mix with the help of an example.

2. Can the marketer choose the elements of the promotion mix arbitrarily? Discuss the
factors that may affect his choice of the elements.

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3. What is advertising? Is it the same as publicity?

4. Critically evaluate the role of advertising in the marketing strategy of an organization.

5. Highlight the benefits and limitations of advertising.

6. What are the sub groups of advertising media?

7 Identify the advertising objectives for Life Insurance Corporation of India products.
Compare them with those of ICICI Prudential.
8 “I am frequently asked what my strategic objectives are. I have two: profit and growth. I
want to get as much of both as I can. Though I have to send figures to the headquarters,
they don’t mean much. I just go after all I can get.” What do you think of this statement
by the general manager marketing of a division of a large FMCG company.

14.13 Reference Books

- V.S.Ramaswamy, S Namakumari(2009); Marketing Management; MacMillan,

- S.A Sherlekar (14th edition); Marketing Management; Himalaya Publishing House,

Mumbai.

- Michael.J.Etzel, Ajay Pandit,Bruce. J.Walker, William.J.Stanton (13 th Edition),

Marketing Concepts and Cases; Tata McGraw hill Companies, New Delhi.

- James.R.Ogden, Denise.T.Ogden (2008); Integrated Retail Management; Biztantra,

New Delhi.

- Biplab.S.Bose,(2007); Marketing Management; Himalaya Publishing House, Mumbai

- Kothari, Mehta, Sharma (2009); Marketing Management; RBD Publications, Jaipur

- Phillip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha,12 th edition,
Marketing Management; Pearson Prentice Hall; New Delhi.

Unit - 15 : Sales Promotion

Structure of Unit:

15.0 Objectives
15.1 Introduction
15.2 Sales Promotion in Recent Years
15.3 Consumer Promotions in the Indian Market
15.4 Objectives of Sales Promotion
15.5 Nature and Scope of Sales Promotion
15.6 Major Decisions in Designing Sales Promotion
15.7 Importance of Sales Promotion
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15.8 Summary
15.9 Self Assessment Questions
15.10 Reference Books

15.0 Objectives

After completing this unit, you would be able to know:

• Meaning of sales promotion

• Objectives of sales promotion;
• Various tools used in sales promotion;  Role of each tool in promoting sales; and
• Importance of sales promotion in business.

15.1 Introduction

Sales Promotion, which is the third major component of the promotion mix, , a key ingredient in
marketing campaigns, is a direct and instant inducement aimed at an immediate increase in sales,
consists of a collection of incentive tools, mostly short term, designed to stimulate quicker or
greater purchase of particular products or services by consumers or the trade.. In a competitive
market, sales promotion come bandy to a marketer in meeting the short-term sales requirements. It
serves a a supporting activity to advertising and personal selling.
Whereas advertising offers a reason to buy, sales promotion offers an incentive to buy. Sales
promotion includes tools for consumer promotion (samples, coupons, cash refund offers, prices
off, premiums, prizes, patronage rewards, free trials, warranties, tie-in promotions, cross-
promotions, POP displays, and demonstrations); trade promotion (prices off, advertising and
display allowances, and free goods); and business and sales-force promotion(Trade shows and
conventions, contests for sales reps, and specialty advertising).”Marketing Memo: Consumer
Promotions in the Indian Market” provides an overview of commonly used sales promotions in
the country.

15.2 Sales Promotion in Recent Years

While promos have always been a part of consumer marketing, there seems to be a surge in it in
the present times. Nowadays with any article that you buy, another article would, most often, be
thrust on you - free. Analysis shows that across the globe the share of sales promotion activities in
the total promotion spend has been constantly going up over the years, while that of advertising is
getting reduced. According to AC
Nielsen, not only has sales promotion been increasing in size, but the nature of the ‘promos’ has also
been changing dramatically. Until the mid-nineties, ‘promos’ were simple giveaways such as recipe
books and measuring jars. They were generally low value items. Their effect in terms of
incentivisation was also low. The present decade has seen a major change in the nature of promos:
big contests, coupon . samples in magazines and deals on the Internet have now become the common
thing. Moreover, in the earlier days, sales promotion was applied only to certain product categories.
Today, it permeates all product categories. The year 2008 has seen the ultimate in sales promotion
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with offers like ‘Buy a House. Get One Free’. The extent to which the sales promotion theatre has
transformed can be grasped from the innumerable buying lures we see every day in the marketplace.
Some of the Innumerable Buying Lures Seen in the Marketplace include:

• Buy a chocolate; get a pack of crayons free.

• Buy a carton of cornflakes; get a pack of orange juice free.
• Buy a pack of cooking oil; get a pack of Atta free.
• Buy a Jordan tooth-brush; get a Listerine mouthwash free
• Buy a box of Cerelac; get a Johnson’s baby soap free
• Buy a pack of Pond’s face wash; get another free
• Buy a Park Avenue trouser; get a belt worth Rs 799 Free.
• Buy a CD player, take a free ticket to World Cup soccer (if you are lucky)  Buy a
chocolate; win a free holiday trip to Switzerland, and Australia.
• Buy a colour TV; win a Mercedes Benz.
• Buy two, get one free
• Buy one, get one free
• Buy from our retail store; get bonus points/gifts
• Exchange your used car; get a loyalty bonus
• Purchase a car; get spare parts and service free for 2 years
• Easy loans; Zero interest loans; lowest EMI
• Get Free samples
• ‘Scratch and win’; get lucky with our Sweepstakes
• Get cash back on credit card purchases
• Fly for Rs 500; Fly for Re.1; Fly free
• Bank with us and get these rewards: (ABN AMRO)  Rewards for withdrawing cash
from ATMs.
• Rewards for ordering cash deliveries. Rewards for paying electricity bills. Rewards for
transferring funds. Rewards for ordering drafts.
• Stocktaking sales; lowest prices
• Clearance sales; rock bottom prices

15.3 Consumer Promotions in the Indian Market

Sales promotion expenditure by various marketing companies in India has been growing at a rapid
pace over the years. In 2001, there were as many as 2,050 promotional schemes of different kinds
in the fastmoving consumer goods industry in India. What are the different types of promotional
schemes adopted by companies in the consumer product category in India? To obtain an empirical
view on this question, a study was carried out through a content analysis of 885 consumer
promotion schemes announced through advertisements (648 print and 237 television
advertisements) for the period 1996 to 2003. Some of the findings of this study are as follows:

1. The most frequently launched promotion is the premium offer (offering a free gift in
addition to the main purchase). This scheme constituted 56% of the promotions.
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 2. A sweepstake that provides a chance to win a large prize based on chance either through
lucky draw or a scratch card constituted 10% of the promotional schemes.

3. Price-off (offering a discount on the regular price of purchase) and extra-product offer
(offering an increased quantity of the product/service without an increase in the regular
price) constituted 8% each of the promotional schemes.

4. Buy more and save/get promotions that provide incentives to buy more units of the same
products, or combinations of the same brand but different products (for example, same
brand of air conditioner and refrigerator), constituted about 4% of the promotions.

5. Exchange offers constituted another 4% of the promotions. These types of promotions

were used mostly for consumer durables and kitchen appliances.

6. Contests that provide a chance to win a large prize through skill (demonstrated by
answering a question or writing a brand slogan) constituted 3% of the schemes.

7. Other types of schemes, such as zero-percent financing, reward points, constituted the
remaining proportion of the promotions.

8. Consumer durable category emerged as the most frequently promoted product segment
accounting for 20% of the total promotions in India. This segment is followed by toiletries
(about 14%), basic food items (about 13%) and computers (about 11 %).

9. Promotions that offered unrelated products along with the purchase of the main product
(for example, free batteries with bathing soap, or free salt with a packet of tea) constituted
52% of the “free gift” promotional schemes. In this category of promotions, offering
related products (free soap with face cream or free shampoo sachet with hair oil)
constituted another 33% and complimentary product offers (free shirt with trouser or a free
voltage stabilizer with air conditioner) constituted the remaining proportion.

10. The premium-offer schemes emerged as the most popular pro-motional offer across
product categories with the exception of cigarette, alcohol, clothing, and footwear
categories. In the cigarette and alcohol categories, sweepstakes are the most popular
promotional offer while for clothing, and footwear, price-off pro-motions are the most
popular. The extra-product promotion is mostly seen in health, over-the-counter medicines,
and enter-tainment-product segments.

11. Contests are more popular among products targeted at and young adults in categories such
as snacks and cold drinks.The market structure, consumer behavior and preferences, and
competitive intensity influence the nature and frequency types of different types of
promotions.

Source: Priya Jha Dang, Abraham Koshy and Dinesh Sharma, “An Empirical Analysis of
Different Types of Consumer Promotions in the Marketing 11 no. 1 (2005): 104-122.

15.4 Objectives of Sales Promotion

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Sales promotion tools vary in their specific objectives. A free sample stimulates consumer trial,
whereas a free management-advisory service aims at cementing a long-term relationship with a
retailer. Sellers use incentive-type promotions to attract new trials, to reward loyal customer and to
increase the repurchase rates of occasional users. Sales promotions often attract brand switchers,
who are primarily looking for low price, good value, or premiums . If some of them would not
have otherwise tried the brand, promotion can yield long-term increases in market share.
Sales promotions in markets of high brand similarity can produce a high sales response in the
short run but little permanent gain in brand preference over the longer term. In markets of high
brand dissimilarity, they may be able to alter market shares permanently. In addition to brand
switching, consumers may engage in stockpiling-purchasing earlier than usual (purchase
acceleration) or purchasing extra quantities. But sales may then hit a post promotion dip.
A number of sales promotion benefits flow to manufacturers and consumers. Manufacturers can
adjust to short-term variations in supply and demand and test how high a list price they can
charge, because they can always discount it. Promotions induce consumers to try new products
and lead to more varied retail formats, such as everyday low pricing and promotional pricing. For
retailers, promotions may increase sales of complementary categories (cake mix promotions may
drive frosting sales) as well as induce store switching. They promote greater consumer awareness
of prices. They help manufacturers sell more than normal at the list price and adapt programs to
different consumer segments. Service marketers also employ sales promotions to attract new
customers and establish loyalty.
The main objective of sales promotion is to increase sales. However, there are also some other
objectives of sales promotion. The objectives are:
i. To Introduce New Productsii. To Attract New Customers and Retain the Existing Ones iii.
To Maintain Sales of Seasonal Products iv. To Meet the Challenge of Competition
Let us learn about these objectives in details.

i To Introduce New Products Have you ever heard about distribution of free samples?
Perhaps you know that many companies distribute free samples while introducing new
products. The consumers after using these free samples may develop a taste for it and buy
the products later for consumption.

ii. To Attract New Customers and Retain the Existing Ones: Sales promotion measures
help to attract or create new customers for the products. While moving in the market,
customers are generally attracted towards the product that offers discount, gift, prize, etc
on buying. These are some of the tools used to encourage the customers to buy the goods.
Thus, it helps to retain the existing customers, and at the same time it also attracts some
new customers to buy the product.
iii. To Maintain Sales of Seasonal Products: There are some products like air conditioner,
fan, refrigerator, cooler, winter clothes, room heater, sunscreen lotion, glycerin soap etc.,
which are used only in particular seasons. To maintain the sale of these types of products
normally the manufacturers and dealers give off-season discount. For example, you can
buy air conditioner in winter at a reduced price. Similarly you may get discount on winter
clothes during summer.

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 iv. To Meet the Challenge of Competition: Today’s business faces competition all the time.
New products frequently come to the market and at the same time improvement also takes
place. So sales promotion measures have become essential to retain the market share of the
seller or producer in the product-market.

15.5 Nature and Scope of Sales Promotion

Sales promotion prompts the consumers to buy a particular product in a given time frame. It
encourages them to purchase the particular brand over another, to purchase it more often, and to
purchase it in larger quantities. Most importantly it gets people to talk about the brand. Sales
promotion actually serves a large basket of marketing objectives.
Like personal selling and advertising, sales promotion too engages itself in communicating value.
Sales promotion not only communicates value, but also changes the price-value equation of a
product in favour of the consumer. It accomplishes this by offering either a price-off or an
incentive in kind. The consumer, who had so far assigned a particular value to the offer, now finds
some extra value in it. One can thus say that sales promotion performs the twin task of value
alteration and value communication.
How does Sales Promotion Differ from Advertising? Sales promotion differs from advertising in the
following ways:
Sales Promotion helps in:
• Increasing sales in the immediate time frame
• Introducing new products to the trade as well as the consumers Encouraging trial
purchases/ securing new accounts Neutralising competitors’ moves and thwarting their
attempts to gamer larger sales
• Unloading accumulated inventory
• Building inventory at retail points
• Overcoming seasonal slumps
• Retaining existing customers
• Retrieving lost customers
• Introducing new pack sizes
• Motivating the salesmen to sell more and sell the full line of products
• Motivating the dealer to buy more/increase the size of ‘at a time orders’ and push more
of the brands that are on promotion
• Smoothening out manufacturing by minimising peaks and valleys in sales
• Defending shelf-space at retail outlets against competition and securing larger space
• Adding excitement to the company’s merchandise within the store
• Supporting and supplementing the advertising and personal selling efforts
• Making consumers switch brands in favour of the firm

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15.6 Major Decisions in Designing Sales Promotion

In using sales promotion, a company must establish its objectives, select the tools, develop the
program, pre-test the program, implement and control it, and evaluate the results.
1. ESTABLISHING OBJECTIVES:
Sales promotion objectives derive from broader promotion objectives, which derive from more
basic marketing objectives for the product. For consumers, objectives include encouraging
purchase of largersized units, building trial among nonusers, and attracting switchers away from
competitors’ brands. Ideally, promotions with consumers would have short-run sales impact as
well as long-run brand equity effects. For retailers, objectives include persuading retailers to carry
new items and higher levels of inventory, encouraging off-season buying, encouraging stocking of
related items, offsetting competitive promotions, building brand loyalty, and gaining entry into
new retail outlets. For the sales force, objectives include encouraging support of a new product or
model, encouraging more prospecting, and stimulating offseason sales.
2. SELECTING CONSUMER PROMOTION TOOLS:
The promotion planner should take into account the type of market, sales promotion objectives,
competitive conditions, and each tool’s cost-effectiveness. The main consumer promotion tools
are summarized below. .Manufacturer promotions are, for instance in the auto industry, rebates,
gifts to motivate test drives and purchases, and high-value trade-in credit. Retailer promotions
include price cuts, feature advertising, retailer coupons, and retailer contests or premiums.
Major Consumer Promotion Tools:
Samples: Offer of a free amount of a product or service delivered door-to-door, sent in the
mail, picked up in a store, attached to another product, or featured in an advertising offer.
Coupons: Certificates entitling the bearer to a stated saving on the purchase of a specific
product: mailed, enclosed in other products or attached to them, or inserted in magazine and
newspaper ads.
Cash Refund Offers (rebates): Provide a price reduction after purchase rather than at the
retail shop: Consumer sends a specified “proof of purchase” to the manufacturer who
“refunds” part of the purchase price by mail.
Price Packs (cents-off deals): Offers to consumers of savings off the regular price of a
product, flagged on the label or package. A reduced-price pack is a single package sold at a
reduced price (such as two for the price of one). A banded pack is two related products
banded together (such as a toothbrush and toothpaste).
Premiums (gifts): Merchandise offered at a relatively low cost or free as an incentive to
purchase a particular product. A with-pack premium accompanies the product inside or on
the package. A free in-the-mail premium is mailed to consumers who send in a proof of
purchase, such as a box top or UPC code. A self-liquidating premium is sold below its
normal retail price to consumers who request it.
Frequency Programs: Programs providing rewards related to the consumer’s frequency and
intensity in purchasing the company’s products or services.

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 Prizes (contests, sweepstakes, games): Prizes are offers of the chance to win cash, trips,
or merchandise as a result of purchasing something. A contest calls for consumers to
submit an entry to be examined by a panel of judges who will select the best entries. A
sweepstakes asks consumers to submit their names in a drawing. A game presents
consumers with something every time they buy-bingo numbers, missing letters-which
might help them win a prize.
Patronage Awards: Values in cash or in other forms that are proportional to patronage of a
certain vendor or group of vendors.
Free Trials: Inviting prospective purchasers to try the product without cost in the hope
that they will buy. Product Warranties: Explicit or implicit promises by sellers that the
product will perform as specified or that the seller will fix it or refund the customer’s
money during a specified period.
Tie-in Promotions: Two or more brands or companies team up on coupons, refunds, and
contests to increase pulling power.
Cross-Promotions: Using one brand to advertise another noncompeting brand.

Point-ot-Purchase (P-O-P) Displays and Demonstrations: P-O-P displays and

demonstrations take place at the point of purchase or sale.
The growing power of large retailers has increased their ability to demand trade promotion at the
expense of consumer promotion and advertising.”! The company’s sales force and its brand
managers are often at odds over trade promotion. The sales force says local retailers will not keep
the company’s products on the shelf unless they receive more trade promotion money, whereas
brand managers want to spend the limited funds on consumer motion and advertising.
Manufacturers face several challenges in managing trade promotions. First, they often d it difficult
to police retailers to make sure they are doing what they agreed to do.
Manufacturers are increasingly insisting on proof of performance before paying any allowances.
Second, some retailers are doing forward buying-that is, buying a greater entity during the deal
period than they can immediately sell. Retailers might respond to lO percent-off-case allowance
by buying a 12-week or longer supply. The manufacturer must schedule more production than
planned and bear the costs of extra work shifts and over time. Third, some retailers are diverting,
buying more cases than needed in a region in which the manufacturer offered a deal, and shipping
the surplus to their stores in nondeal regions. Manufacturers handle forward buying and diverting
by limiting the amount they sell at a discount, or producing and delivering less than the full order
in an effort to smooth production. All said, many manufacturers feel that trade promotion has
become a nightmare. It contains layers of deals, is complex to administer, and often leads to lost
revenues.
3. SELECTING BUSINESS AND SALES FORCE PROMOTION TOOLS:
Companies spend large amounts of money on business and sales-force promotion tools to gather
business leads, impress and reward customers, and motivate the sales force to greater effort. They
typically develop budgets for tools that remain fairly constant from year to year. For many new
businesses that want to make a splash to a targeted audience, especially in the B2B world, trade
shows are an important tool, but the cost per contact is the highest of all communication options.

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The following example shows how one newcomer in the private jet industry makes trade shows
pay.
4. SELECTING TRADE PROMOTION TOOLS:
Manufacturers use a number of trade pro tools . Manufacturers award money to the trade (1) to
persuade the or wholesaler to carry the brand; (2) to persuade the retailer or wholesaler to carry
more than the normal amount; (3) to induce retailers to promote the brand by featuring, and price
reductions; and (4) to stimulate retailers and their sales clerks to push the product.
Major Trade Promotion Tools:
Price-Off (off-invoice or off-list): A straight discount off the list price on each case
purchased during a static time period.
Allowance: An amount offered in return for the retailer’s agreeing to feature the
manufacturer’s products in some way. An advertising allowance compensates retailers for
advertising the manufacturer’s product. A display allowance compensates them for
carrying a special product display.
Free Goods: Offers of extra cases of merchandise to intermediaries who buy a certain
quantity or who feature a certain flavor or size.
Trade Shows and Conventions: Industry associations organize annual trade shows and
conventions.
Business marketers may spend as much as 35% of their annual promotion budget on trade
shows. Over 5,600 trade shows take place every year, drawing approximately 80 million
attendees. Trade show attendance can range from a few thousand people to over 70,000.
Participating vendors expect several benefits, including generating new sales leads,
maintaining customer contacts, introducing new products, meeting new customers, selling
more to present customers, and educating customers with publications, videos, and other
audiovisual materials.
Sales Contests: A sales contest aims at inducing the sales force or dealers to increase their
sales results over a stated period, with prizes (money, trips, gifts) going to those who
succeed.
Specialty Advertising: Specialty advertising consists of useful, low-cost items bearing the
company’s name and address, and sometimes an advertising message that salespeople give
to prospects and customers. Common items are ballpoint pens, calendars, key chains,
flashlights, tote bags, and memo pads.
[Source: Betsy Spethman, ‘Trade Promotion Redefined,” Brandweek. March 13, 1995;pp25-
32]

5. DEVELOPING THE PROGRAM:

In planning sales promotion programs, marketers increasingly blending several media into a total
campaign concept, such as the following promotion that received a gold medal in the 2007 Reggie
Award competition from the Promotional Marketing Association.
In deciding to use a particular incentive, marketers must first determine the size of the incentive. A
certain minimum is necessary if the promotion is to succeed. Second, the marketing manager must
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establish conditions for participation. Incentives might be offered to everyone or to select groups.
Third, the marketer must decide on the duration of the promotion. According to one researcher, the
optimal frequency is about three weeks per quarter and optimal duration is the length of the
average purchase cycle. Fourth, the market must choose a distribution vehicle.
A 15% price-off coupon can be distributed i by mail, or in advertising. Fifth, the marketing
manager must establish the timing of promotion. Finally, the marketer must determine the total
sales promotion budget. The cost of a particular promotion consists of the administrative cost
(printing, mailing, an promoting the deal) and the incentive cost (cost of premium or cents-off,
including redemp-tion costs), multiplied by the expected number of units sold. The cost of a
coupon de would recognize that only a fraction of consumers will redeem the coupons.
6. PRETESTING, IMPLEMENTING, CONTROLLING, AND EVALUATING THE
PROGRAMME:
Although most sales promotion programs are designed on the basis of experience and we can
determine whether the tools are appropriate, the incentive size optimal, and the presentation
method efficient. Consumers can be asked to rate or rank different possible deals, trial tests can be
run in limited geographic areas.
Marketing managers must prepare implementation and control plans that cover lead and sell- in
time for each individual promotion. Lead time is the time necessary to prepare the program prior
to launching it. Sell-in time begins with the promotional launch and en when approximately 95%
of the deal merchandise is in the hands of consumers.
Manufacturers can evaluate the program using sales data, consumer surveys, and experiments.
Sales (scanner) data helps analyze the types of people who took advantage of the promotion, what
they bought before the promotion, and how they behaved later toward the brand and other brands.
Sales promotions work best when they attract competitors’ customers who then switch. Consumer
surveys can uncover how many recall the promotion, what they thought of it, how many took
advantage of it, and how the promotion affect subsequent brand-choice behavior.” Experiments
vary such attributes as incentive value. duration, and distribution media. For example, coupons
can be sent to half the households in a consumer panel. Data on the redemption of the coupons
sent will indicate whether the coupons led more people to buy the product.
Additional costs beyond the cost of specific promotion include the risk that promotions might
decrease long run brand loyalty. Second, promotion can be more expensive than they appear.
Some are inevitably distributed to the wrong consumers. Third are the cost of the special
production runs, extra sales-force effort,and handling requirements. Finally certain promotions
irritate retailers, who may demand extra trade allowances or refuse to cooperate.

15.7 Importance of Sales Promotion

The business world today is a world of competition. A business cannot survive if its products do
not sell in the market. Thus, all marketing activities are undertaken to increase sales. Producers
may spend a lot on advertising and personal selling. Still the product may not sell. So incentives
need to be offered to attract customers to buy the product. Thus, sales promotion is important to
increase the sale of any product. Let us discuss the importance of sales promotion from the point
of view of manufacturers and consumers.
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From the Point of View of Manufacturers: Sales promotion is important for manufacturers
because
i. It helps to increase sales in a competitive market and thus, increases profits; ii. It helps
to introduce new products in the market by drawing the attention of potential customers; iii.
When a new product is introduced or there is a change of fashion or taste of consumers,
existing stocks can be quickly disposed off;
iv. It stabilizes sales volume by keeping its customers with them. In the age of competition it
is quite much possible that a customer may change his/her mind and try other brands.
Various incentives under sales promotion schemes help to retain the customers.

From the Point of View of Consumers: Sales promotion is important for consumers because

i. The consumer gets the product at a cheaper rate;

ii. It gives financial benefit to the customers by way of providing prizes and sending them
to visit different places;
iii. The consumer gets all information about the quality, features and uses of different
products; iv. Certain schemes like money back offer creates confidence in the mind of
customers about the quality of goods; and
v. It helps to raise the standard of living of people. By exchanging their old items they can use
latest items available in the market. Use of such goods improves their image in society.

15.8 Summary

Sales Promotion, which is the third major component of the promotion mix, , a key ingredient in
marketing campaigns, is a direct and instant inducement aimed at an immediate increase in sales,
consists of a collection of incentive tools, mostly short term, designed to stimulate quicker or
greater purchase of particular products or services by consumers or the trade.. In a competitive
market, sales promotion come bandy to a marketer in meeting the short-term sales requirements. It
serves a supporting activity to advertising and personal selling.
The main objective of sales promotion is to increase sales. However, there are also some other
objectives of sales promotion. The objectives are:
i. To introduce new products
ii. To attract new customers and retain the existing onesiii. To maintain
sales of seasonal products iv. To meet the challenge of competition
In using sales promotion, a company must establish its objectives, select the tools, develop the
program, pre-test the program, implement and control it, and evaluate the results. Sales promotion
objectives derive from broader promotion objectives, which derive from more basic marketing
objectives for the product. For consumers, objectives include encouraging purchase of largersized
units, building trial among nonusers, and attracting switchers away from competitors’ brands.
Ideally, promotions with consumers would have short-run sales impact as well as long-run brand
equity effects. For retailers, objectives include persuading retailers to carry new items and higher
levels of inventory, encouraging off-season buying, encouraging stocking of related items,
offsetting competitive promotions, building brand loyalty, and gaining entry into new retail

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outlets. For the sales force, objectives include encouraging support of a new product or model,
encouraging more prospecting, and stimulating offseason sales.

15.9 Self Assessment Questions

1. Define Sales Promotion.

2. State the importance of Sales Promotion from the point of view of manufacturers.
3. State the importance of Sales Promotion from the point of view of consumers.
4. List any six tools used in Sales Promotion
5. State the objectives of Sales Promotion
6. Explain the meaning of ‘Sales Promotion’. Why is Sales Promotion necessary?
7. Explain any two techniques of Sales Promotion, with example.
8. State any two objectives of Sales Promotion.
9. Explain – “Price off offer” and “Free-Samples” as techniques of Sales Promotion.
10. Explain how Sales Promotion techniques help in promoting sales.
11. A toothpaste company is giving 250 grams toothpaste free with a pack of 500 gm
toothpaste. Name this technique of sales promotion. What is the specific objective of
this scheme? Explain two more schemes of Sales Promotion other than this.
12. ‘To introduce new products, to create new customers and retain the existing ones, to
remain competitive’ are the objectives of Sales promotion. Explain how?
13. Define Sales Promotion. What are the objectives of Sales Promotion?
14. Explain the term ‘Sales Promotion’. Discuss any four techniques of Sales Promotion?
15. ‘Sales Promotion is important both for manufacturer and consumers’. Explain how?
16. Which of the following statements are true and which are false?
i. Discount on price is allowed only for those products of which sales tend to
decline.
ii. Sales promotion schemes are announced only when new products frequently
come in the market. iii. Free samples are distributed to induce customers to try out new
products.
iv. Customers want to buy air-conditioners in summer to get the benefit of off-
season discount.
v. Sales promotion helps to retain existing customers as well as create new ones.
Activity
i. Make an enquiry from the neighbouring market retailers at what time they offer
stockclearance sale and why.
ii. Collect information through advertisements in newspapers and magazines
regarding various sales promotion schemes introduced by manufacturers

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15.10Reference Books

- V. S. Ramaswamy, S. Namakumari; 2009; Marketing Management; MacMillan

Publishers Pvt Ltd.
- Kotler, Keller, Koshy, Jha; 2009; 13th Edition; Marketing Management: A South Asian
Perspective.

Unit - 16 : Direct Marketing and Personal Selling

Structure of Unit:

16.0 Objectives
16.1 Introduction
16.2 Meaning of Direct Marketing
16.3 Objectives of Direct Marketing
16.4 Characteristics of Direct Marketing
16.5 Difference between Conventional Marketing & Direct Marketing
16.6 Requisites for Success of Direct Marketing
16.7 Forms of Direct Marketing
16.8 Personal Selling
16.9 Role of Personal Selling
16.10 Nature, Significance, and Scope of Personal Selling
16.11 The Personal Selling Process
16.12 Summary
16.13 Self Assessment Questions
16.14 Reference Books

16.0 Objective

After reading this unit, you should be able to know:

• Meaning and scope of Direct marketing

• The characteristics of direct marketing, as different from other Promotional Methods
• Personal selling
• Importance of personal selling under different conditions
• The selling process

16.1 Introduction

The widening scope of Direct Marketing has been both evolutionary and revolutionary. Traditional
applications have been refined. New applications have emerged. The explosive growth of Direct
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Marketing in the ‘50’s, 60’s and ‘70’s must be credited, for the most part, to entrepreneurs,
pioneers who saw Direct Marketing as another channel of distribution for traditional marketers in
particular. In our own country, the pioneer in this field has been the Readers’ Digest Publications.
Also, Bull Worker has been one of the oldest companies in India to indulge in Direct Marketing
with their Free Trial offers by post, the advertisements of which are still visible in the print media.
We notice that marketers in India are already using Direct Marketing, Just about everybody uses
Direct Mail sometime or the other, almost everyone in business uses the telephone to reach his
customers or prospects directly. Lately, most companies are officially recognizing the concept and
planning conscious programmes along these lines and hence. Direct Marketing is fast becoming a
buzzword of the ‘90’s with both agencies and clients.

16.2 Meaning of Direct Marketing

On a simplistic note one can say that Direct Marketing is nothing but getting the message through,
directly. However the Direct Marketing Association, (U.S.A.) defines it as “an interactive system
of marketing which uses one or more advertising media to affect a measurable response and/or
transaction at any location.” In the above definition we identify some key words, which
differentiate Direct Marketing (DM) from other marketing communications disciplines.
These key words are:
Interactive: one to one communication or interaction between the marketer and the
prospect/customer. One or more advertising media: a combination of media used to synergize,
often more effective than any single medium.
Measurable Response: possible to measure response, quite accurately.
Transaction at Any Location: may take place by phone, at a kiosk, by mail or by personal
visit.
Direct Marketing, Direct Mail, Mail Order, Direct Response Advertising: Many relate Direct
Marketing to a medium (Direct Mail) or a technique (Direct Response Advertising) or a channel of
distribution (Mail Order). In fact DM is all the three, and much more.
In the words of Drayton Bird-Vice-Chairman and Creative Director, Ogilvy and Mather Direct
Worldwide, “It includes any activity whereby you reach your customer or prospect directly and
they respond to you directly.”
Direct Response Advertising in any medium including Direct Mail is that which offers a
measurable response and /or transaction at any location, It is any advertising used to sell directly
to customers, be it an advertisement with a coupon in a newspaper or magazine or even a
telephone solicitation.
Direct Mail is a medium through which a pre-defined and predetermined number of selected
consumers are addressed through the form of mail. Using computers, letters are easily
personalised to make the maximum impact on the person receiving it. This medium becomes very
effective in respect to selectivity of consumers, timings and the ability for the customer to respond
using coupons or pre-paid reply envelopes.
Mail Order is a method of selling that relies on Direct Response Advertising to affect a
measurable response and/or transaction by mail, telephone or other interactive media. Mail Order
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usually means the sale of products or services to customer or to industrial users by means of a
catalog or Direct Response Advertising, In many cases, the medium used is Direct Mail and the
fulfilment is also by mail. As distinguished from Direct Mail, which remains one of the several
advertising media used by Direct Marketers, Mail-Order is a selling method.
Alternative method of selling encompassed in the definition of Direct Marketing are those in which,
as a result of Direct Response Advertising, the buyer personally visits the sellers location to effect a
transactions.
The seller calls at the buyer’s location in person or by telephone to effect a transaction.

16.3 Objectives of Direct Marketing

Most direct marketers aim to receive an order from prospects and judge a campaign’s success by
the response rate. An order-response rate of 2% is normally considered good, although this
number varies with product category, price, and the nature of the offering. Direct mail can also
produce prospect leads, strengthen customer relationships, inform and educate customers, remind
customers of offers, and reinforce recent customer purchase decisions.

16.4 Characteristics of Direct Marketing

The characteristics which distinguish Direct Marketing from all other marketing methods is its
efficiency. The ability to swiftly determine the success or failure of any effort by simply counting
the pre-coded responses enables the Direct Marketers to test their programmes on a small scale
before incurring any major expenditure. It provides the advantage of being able to target,
personalise and get immediate action. Direct Marketing is most effective in directing a marketing
effort only to likely prospects, Personalisation means the ability to speak to potential customers as
individuals and not as impersonal members of a vast audience. This has been made possible
through computerised printing techniques which enable a Direct Marketer to store, and later recall
in a printed format, personalised information on each member of the audience they wish to reach.
While other marketing methods rely on the memory of their prospects to recall their advertising
when they happen to be shopping for a particular product or service, Direct Marketers have
developed refined techniques for getting an immediate response.
Direct marketing differs from other disciplines such as sales promotion and general advertising.
While general advertising speaks to the customers and does not require immediate action, sales
promotion may use the techniques that Direct Marketers use.
Essentially, the purpose of Direct Marketing can then be expressed as a three step process:
1. Isolate your customers
2. Build a continuing relationship
3. Build a profitable relationship
Direct Marketing of What and for Whom:
Many national advertisers earlier disclaimed Direct Marketing. This was because it had a
reputation as a haven for the disreputable. It was also regarded as a sales tool for relatively
inexpensive merchandise. In part this attitude was due to the risk perceived by the customers in
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purchasing goods by mail from companies with no established reputation. Consumers were
sceptical and dissatisfaction prevailed.
However, today many companies engage in Direct Marketing efforts often directed to a very
upscale audience. The range of users is diverse ranging from individuals to various businesses
giant corporations as well as small retailers and industrial service organisations. However, it is not
confined to these areas only. Elements of Direct Marketing are used by educational and health
institutions, religious and charitable organisations, theatre groups and universities to keep
members informed, solicit funds and promote understanding. In India also social institutions like
Lok Kalyan Samity, National Aids Control Organisations and a host of others, have been utilizing
direct marketing, to accomplish these objectives.
Similarly, in the recent years, the scope of products offered by Direct Marketing has expanded
substantially. The axiom that anything can be sold by Direct Marketing has become more
important. The range of products is diverse; from a host, of speciality general merchandise at one
end including clothing, home furnishings, gift items to the burgeoning category of financial
products and insurance at the other.
Products lending themselves to Direct Marketing must be unique and not easily available in the
neighbourhood retail store. It should have a distinguished quality or render useful service not
generally convenient to buy. It should open the door for repeat business. If it comes with a well
known name backing it, so much the better.
Above all, it must be good value for money. The advertiser must be geared to handle repeat
business.

16.5 Difference between Conventional Marketing & Direct Marketing

There are five main differences between DM and conventional marketing. These are elaborated
below.
1. Conventional Marketing is Mass Marketing: DM is One-to-One Marketing Conventional
marketing is mass marketing; ‘The marketer approaches the customers on a mass basis
and sells to them indirectly. He goes for mass production, mass communication and mass
distribution. Conventional marketing has several limits; for example, it affords little scope
for customisation, which is the key in most businesses today. In contrast, direct marketing
is demassified marketing; here, the marketer deals with the customers direct and on a one-
to-one basis and markets the products directly to them. He approaches the customers
individually, communicates with them on a one-to-one basis and offers products that are
modified to suit the requirements of the chosen customers. In other words, DM relies on
customised production, individualised distribution and individualised
communication/promotion.
And, this is precisely why direct marketing is referred to as demassified marketing.
Building relationship with customers, one at a time, is essential in today’s marketing.
While mass marketing targets the average customer of the chosen segment and develops its
offer for the average customer, DM targets an individual customer and develops its offer
specifically for him.

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2. Conventional Marketing Deals with Customers Indirectly: DM Deals with Them
Directly. In DM, the marketer knows his customer and has, on his hands, a specific profile
of each individual customer. He builds a relationship with the customer. He works on the
premise: you tell me what you want and also tell me how I should give it to you; I shall
give it to you accordingly. Moreover, the long-term value of the customer comes to
prominence in DM. In conventional marketing, the marketer sells to the customers
indirectly; normally, the customer is an anonymous entity to the firm.

3. Conventional Marketing is a One-Way Activity: DM is Interactive. While

conventional marketing is a one-way activity to a large extent, direct marketing is
interactive to a large extent. For example, conventional marketing has to remain content
with one-way messages, flowing from the firm to the market. Direct marketing enjoys the
advantage of two-way communication, between the firm and each one of its customers.
Both sides are able to seek and obtain clarifications in an interactive way. Giving
information does not amount to best persuasion; one has to create interactive dialogue. In
fact, with the latest forms of DM, like online marketing, real time online interaction
between the marketer and the customer has become the common thing.

4. Conventional Marketing Relies Heavily on Channels: DM is Channel-Less. In

conventional marketing, the marketing activity normally takes place through marketing
channels intermediaries/stores. In DM, it takes place without any channels/stores. The
marketer secures the sale directly from the consumer and this enables the latter to receive
the product directly and without having to visit a store.

5. Conventional Marketing Relies Heavily on Mass Promotion: DM Does Not Involve

Mass Promotion. While conventional marketing relies heavily on mass promotion for
generating demand, DM goes for promotion on a one-to-one basis. In fact, the absence of
advertising/mass promotion is one major distinguishing feature of DM. As a general rule,
DM rules out mass media advertising. Even the little advertising gets interactive. We are
living in an age of acute media fragmentation. It is getting harder and more expensive to
reach consumers through advertising. A shift from mass to direct marketing is thus
becoming a natural response of marketers. In the matter of sales promotion measures too,
there is difference between the two. While conventional marketing opts for incentives/
promotion/offers on mass basis, direct marketing opts for individualised
incentives/promotion/offers.
DM Scores Over Mass/Conventional Marketing on Many Counts: DM scores over mass-
marketing significantly as it confers many unique benefits. Table 16.1 lists the ways in which DM
scores over conventional marketing.
Let us discuss the more important ones among them in some detail.
DM Delivers Near-Perfect Solutions to Customer’s Problems: Direct marketing facilitates
delivering near-perfect solutions to customer’s problems. As the marketer is able to contact the
customer individually, he can exactly know what the customer wants and make it available to him.
Developments in IT have helped the marketer to gather and process vast amounts of personal data
on customers. Simultaneously, it has enabled customers to communicate back to the marketers
directly and in real time, and tell them what they think of the offers. With such two-way
information, the marketer is able to fine-tune his offer and match it with the customer’s

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requirements. DM is, in fact, information-led marketing. With the back-up of information, it offers
better solutions to customer’s problems.
Enables Customisation In mass marketing, the products on offer are all mass-produced and there
is very little customisation. Direct marketing, on the other hand, helps the marketer to offer
customised products, as per the preference of the customers. With web marketing, the marketer
can completely customise the offers.
Levi Strauss Levi Strauss can be cited as an example. It has introduced web-linked kiosks in its
stores, where customers can design their own pair of jeans, choosing from a number of styles,
colours, shapes and sizes. The information is instantly relayed to its factory at Tennessee, where
the jeans are cut and tailored individually. To ensure quality and reduce errors, Levi Strauss makes
each pair of jeans - from start to finish - by a single group of workers.
Direct marketing is better placed for offering products and services of excellence. Mass marketing
rests on a culture wherein it is almost impossible to offer products of excellence. Infact,
standardisation and excellence are often seen to be antithetical. In certain cases, mass marketing
has actually conditioned the consumers to remain satisfied with unsatisfactory products and has
even restricted their expectation capacity. Direct marketing is a welcome way out in this context.
Facilitates sharper segmentation and targeting; ultimately each individual becomes a target market
Direct marketing also supports accurate segmentation and sharper targeting of the market, and
ultimately it strives to treat each individual customer as a separate segment. This, in turn,
facilitates formulation of highly fine-tuned marketing.
Table 16.1 Differences between Conventional Marketing and DM
Conventional Marketing Direct Marketing I
Conventional marketing is mass marketing DM is demassified marketing; it deals
with customers oneone -to-
Conventional marketing deals with customers DM deals with them directly
Conventional marketing is a one-way activity DM is interactive marketing, with twobetween
the firm and each one of the
Conventional marketing relies heavily on marketing DM is channel-less
channels/stores
Conventional marketing relies heavily on advertising! DM does not involve them
mass promotion

16.6 Requisites for Success of Direct Marketing

Direct marketing is often mistaken as a job of maintaining a list of customers with names and
address and sending occasional communications/news letters to them. Nothing can be farther from
the truth. Direct marketing is an intricate task, involving many steps. And there are several requisites
for its success, as shown below:
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 • Comprehensive, reliable and updated customer database
• Careful and close targeting of markets/prospects
• Service guarantee and product warranty
• Backroom logistics
• An eye for details
• Sustained effort
• Comprehensive, reliable, updated, customer database

Comprehensive, reliable and updated database of consumers is the first requisite for success of a
dir marketing programme. DM and Customer Relations Management (CRM) are similar in this
regard. Lack of proper database is often the primary reason for direct marketing programmes
ending up as junk mail programmes. Direct marketers can build customer database on their own
from internal lists of customers and prospects compiled and maintained by them, or purchase
relevant mailing lists from the market.
Close Targeting of Prospects
Close targeting is an equally important requisite. DM presupposes the ability to precision target
potential converts and the ability to segment them by age, income, geography and other bases.
Conversely this ability inspires some to turn to DM. DM’s potential is not realised when it is not
targeted closely. A firm cannot target all the customers in its customer database for a given DM
programme. The programme would fit only a few among them. In fact, the ultimate aim of DM is
to treat each individual customer as a target segment. Some grouping of the customers may be
okay, but one should not regress back to mass marketing and be satisfied with targeting the so-
called ‘average’ consumer. As Peter Rosenwald, founder of Saatchi & Saatchi Direct Worldwide,
says, ‘the most dangerous word in direct-marketing is “average”. This is still mass marketing - a
smaller “mass”, but mass still.’
Service Guarantee/Product Warranty is Also Essential
Direct marketing proves particularly effective when it is backed by service guarantee/product
warranty. Consumers should feel free to return the product if it falls short of their expectations. We
do see the products of leading direct marketers, being backed by a satisfaction-cum-money back
guarantee.
Such offers add to the credibility of the offer and build consumer confidence.
Efficient Backroom Logistics
The backroom logistics should be perfect. For example, once the responses to a DM programme
start flowing in, there must be a mechanism for attending to them promptly. Also, there should be
a systematic follow-up. Reminder mailers should also go out promptly wherever applicable. Fast
delivery of the product is the most vital part of backroom logistics.
An Eye for Details
An eye for details is essential in DM. For example, care should be taken in designing the mailer.
The outside envelope, the sales letter, the reply form and the reply envelope, all must be carefully
developed. The outside envelope should preferably contain a catchy reason for the recipient to
open the envelope; announcement of a contest, a premium, or other benefits induce interest.

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Sustained Effort
Finally, it must be said that in order to derive full benefit out of direct marketing, it must be adopted
as a regular marketing endeavour; it is not so effective when it is carried out as a one-shot effort.
DM Catches up in India
In India, direct-marketing has been growing steadily in recent years. Many companies are
venturing into DM, though a majority of them still use it only as a supplement to their
conventional (mass) marketing effort. In any case, many companies are diverting a sizeable part
of their promotion budgets to DM. We can also see DM’s share of the promotion budget steadily
increasing in several product categories.
Rising media costs, increasing fragmentation of media, and the growing clutter, have been making
mass communication increasingly expensive. Companies are naturally tempted to try direct
marketing. There is yet another reason. In an era like the present one, where product
differentiation has been getting increasingly blurred, direct marketing becomes particularly
helpful. Marketers want to make up for the absence of any distinction between one brand and the
other by going to the customer directly and building a relationship with him.

16.7 Forms of Direct Marketing

Direct marketing has several forms as it incorporates a variety of media/tools. Corresponding to

the specific media/tools used, specific forms of direct marketing have emerged. For example,
direct-mail marketing is one form of DM. Customised mailing through databases and ‘mail-merge’
facility of word processing is the medium/tool used here. It constitutes one way of reaching a mass
of customers individually. Telemarketing is another form of DM. Here, the phone is the
medium/tool used. Similarly, in catalogue marketing, the catalogue is the tool. All these forms of
di marketing basically do the same thing; they gather customer names and sell their products
direct to them.
While in the earlier days, direct marketing tools were confined to the mail and the telephone,
today DM uses new age tools such as computers, mobile phones, and the Internet for reaching
prospect customers individually. These tools actually permit more effective and more
sophisticated direct marketing. Their availability at a low-cost and high-reach has substantially
enlarged the direct marketing opportunities.
1. Mail Order Marketing/Catalogue Marketing
Mail Order Marketing (MOM), also known as Mail Order Business (MOB) and Catalogue
Marketing is one of the established methods of direct marketing. Since mail order marketers
normally use catalogues for communication with the consumer, this form of marketing came to be
referred to as catalogue marketing. In this method, the consumers become aware of a product
through information furnished to them by the marketer through catalogues dispatched by mail.
The entire marketing takes place by mail. Interested consumers respond by placing a mail order on
the marketer; the product is supplied to the consumer by mail; payment by the consumer is also
made by mail, either by VPP or by cheques.

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2. Direct Mail Marketing
Direct mail marketing (DMM) is similar to MOM/Catalogue marketing. Usually, when a trading
house markets various products by mail order, we refer to it as MOM or MOB and when a
manufacturer practises the same method, we refer to it as DMM. Certain softwares allow creation
of personalised letters, message and offering. In direct mail marketing, not only letters/brochures
are mailed to the prospects, but free product samples, gifts and compliments are also mailed,
depending on the context. We shall see some examples of direct mail marketing.
A few examples: Mothercare India does DMM. It targets mothers who buy items meant for kids.
Jewellers, (Surat Diamond), also do some DMM. They concentrate on credit card holders.
Charagh Din, the wellknown shirt maker in Mumbai, also sends out mailers to prospective
customers and gets some business over the mail. Living Media has been selling a sizable volume
of its ‘Music Today’ cassette through mail order.
Difference between direct mail promotion and direct-mail marketing
A clarification covering direct mail promotion and direct mail marketing will be necessary
and useful at this juncture. When a direct mail campaign stops with the objective of
generating awareness and interest about the product in the minds of the target customers, it
is direct mail promotion. In other words, direct mail here take care of just the
communication task. When the direct mail campaign encompasses the whole range of
marketing tasks, including order booking, product delivery, etc., it becomes direct mail
marketing. Direct mail tries to get an order, direct marketing tries to consummate the entire
marketing process and build a relationship.
3. Direct Response Marketing
Direct Response (DR) is another expression that we come across in the context of direct
marketing. It is similar to, but not exactly the same as direct mail marketing. What distinguishes
direct mail marketing and direct response marketing from each other is the media/instruments
used.
While direct mail marketing relies on mail (letters/mailers) for obtaining the response, DR uses
many different media (including letters/mailers), like telephone, radio, TV and Internet. Some
direct response marketing campaigns, for example, rely totally on television ‘infomercials’
(commercials which give information about products, benefits and usage aspects and obtains
responses).
Toll-free telephone numbers Toll-free telephones too serve as a useful tool of direct response
marketing. Toll-free telephones help better ordering by the customer, better dialogue between the
customers and the company, and better service to the customer. Dell computers is one company
that heavily relies on toll-free numbers to elicit customer responses.
4. Database Marketing
Database marketing is yet another expression we come across in direct marketing. Although all
forms of direct marketing are database-driven, some experts treat database marketing as a distinct
form of direct marketing.

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5. Telemarketing
Telemarketing is yet another form of direct-marketing. Here, the marketer goes direct to the
customer using telecom facilities. Telemarketing facilitates personalised contact, though not face-
to-face contact, with prospects. Compared to mass marketing programmes, it gives the marketer a
better chance to influence the prospects. Second, it enhances marketing productivity by providing
a screening and selection facility through preparatory conversations with prospects. Those who
are not inclined at all are disposed off at the first tele calls. One can thus concentrate on select
prospects. Third, telemarketing is less expensive as compared to most other forms of selling.
Moreover, it can be used in respect of different types of products. It suits industrial products,
services and consumer durables.
6. Teleshopping/Home Shopping
Teleshopping, alternatively known as home shopping, is yet another form of direct marketing.
Here, the marketer hawks the product on air and the consumer watches it on his TV screen at
home, phone up the marketer and buys his requirement.
(i) Benefits the Customer World Over: Shrinking leisure time on the part of consumers has
contributed to the growth of teleshopping. This is now becoming true of the Indian
consumer too, especially the urban-middle class consumer. With teleshopping, in addition
to the convenience, the customer is also better off with lower prices and gift offers, etc.
Teleshopping networks sell their wares on the slogan; ‘The products you see on your
screen are just a phone call away; you get some discounts as well.’

(ii) Benefits the Manufacturer: Manufacturers are happy with the idea, as it promotes their
sales and reduces their costs. To them, teleshopping serves as a good supplement or
substitute for conventional marketing. It provides them a direct link to the consumer. They
also save the retailer margin, as they bypass the retailer. They can use this saving for
remunerating the teleshopping network and for offering discounts to the customer, and
build sales. In fact, one major characteristic of teleshopping is that it is a low-cost retailing
system.
Moreover, teleshopping, with its tightly targeted marketing, enables the manufacturers to
cut their advertising cost as well. It gives them the twin benefit of lower cost and higher
effectiveness of communication. Surveys indicate that the recall level is quite high in
teleshopping. It is a particularly good medium for concept selling and for selling new
products as it permits full demonstration.

(iii) Benefits the Marketer (Teleshopping Entrepreneur): To the marketer, teleshopping

means a novel marketing method that brings sustained revenue. A teleshopping
network/marketer usually get a sizable distribution margin. And, it usually manages the
retailing at a lower unit cost compared to conventional marketing.
In teleshopping, the only significant item of expenditure is the telecasting cost and cost of
producing the programme/ads/demonstrations. So the network saves a considerable amount
out of the margin.

(iv) Benefits the TV Channel: Finally, teleshopping benefits the TV channel as well. For
them, teleshopping is a new source of revenue. Doordarshan, for example, allowed its
channel for teleshopping by Dee’s network on a profit-sharing basis. TV channels, after
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 all, depend on commercials for their income. Teleshopping is naturally an attractive source
of income to them as the activity is totally commercial.
7. Direct Selling (Home Selling)
Direct selling is, of course, the oldest method of marketing known to man. In the by gone ages, all
producers were selling their products to the users only by this method. However, in the era of
modern marketing, direct-selling needs to be revisited.
Difference Between Direct Selling and Direct Marketing
There are differences between non-store retailing and direct marketing. Direct selling is just one of
the methods of non-store retailing.
Direct selling and home selling however, are one and the same. While direct selling and direct
marketing are not one and the same, direct selling and home selling (also known as door-to-door
selling) are one and the same. It is just that the same process is called by two different names.
Both take place without the help of any retail store; and both take the product to buyers’ home.
Some marketers make out a minor distinction between the two. When the direct selling is done by
employee-salespersons, they refer to it as home selling, and when it is done by independent
salespersons cum distributors they refer to it as direct selling. Another minor distinction is that
while home selling invariably takes place at customer’s home; direct selling can take place either
at the customer’s home or his work place. Third, home selling is always one-to-one; direct selling
can, at times be, to a group; the latter form is referred to as party selling or one-to-many direct
selling.
In substance, however, home selling and direct selling are one and the same.
Direct Selling in India
While direct selling has thrived in India all along in the insurance business, in other businesses, it
has been catching up in the country only in recent years. But the progress has been rapid in the
short period. Avon, Amway, Oriflame, Tupperware are all present in India, And, Bodycare has
been using the method for selling its homecare and personal care products. Hindustan Unilever
has also set up in more recent times, its direct selling outfit for its Advance range of cosmetics.
Amway India is a subsidiary of Amway Corporation, entered in India via Multilevel Marketing.
Oriflame, the Swedish cosmetics giant, has also entered the direct selling scene in India. It set up
its shop in India in 1997 and commenced operations in Delhi to start with. It secured special
import license and imported the products from its manufacturing base in Dublin. Tupper, the
founder of the $ 1.1 billion Tupperware Corporation, hit upon the direct sales route way back in
the 1950s when he saw his products languishing on the retail shelves. Tupperware India is a
whollyowned subsidiary of Tupperware Corporation. It set shop in India in 1996.
Drawbacks of Direct Selling
Direct selling has quite a few drawbacks as well. It lacks one important merit that is
characteristically present in conventional retailing. In the latter case, as the consumers visit the
retail shop and pick up the required items, they get a number of options. In contrast, direct selling
does not allow any options. And, there are products that a consumer will not in any case buy
without comparing rival brands. Since direct selling offers only one brand, it has a limitation in
such contexts. Moreover, although direct selling saves channel costs, commissions paid to sales
persons-cum-distributors amount to as high as 30 or 33 per cent of the retail price, especially when
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multi-level marketing model is used. Also, recruiting, training, motivating and retaining good
sales people - most of whom are part timers - is a difficult and expensive task. Another minus
point is that the companies opting for direct selling cannot sell the products through retail shops.
The logic is that sales mostly result out of the sales persons cum distributors’ efforts in developing
a clientele for the product and the rewards thereof should go to them and not to any retail store.
Moreover, only when the channel margins are avoided, can the scheme be viable. This means that
once a firm chooses the direct selling option, it loses the option of selling through the
conventional methods, using retail stores. The firm depends solely on the sales persons and there
is no second route; it is an additional risk. Another drawback is that since direct selling companies
do not generally advertise much, it takes more time for direct sellers to develop brand loyalty
among customers. It takes much longer to educate customers about these companies and the
attributes of their products. When one chooses traditional marketing, advertising offers a shorter
and ready route to the consumer.
For direct selling to successfully work, the face-to-face interaction must be capable of producing a
significant value addition to the consumer, compared to purchasing from a retail shop. Products to
which this idea does not apply may not gain much from the system. Finally, the method will not
be effective when times and circumstances change. For example, Avon’s door-to-door selling has
suffered in the C since the 1980s as more women had started going to work. There were not
enough housewives at home to be approached through direct selling.
8. Multi-Level Marketing (MLM)
Multi-Level Marketing (MLM) is a modified version of direct selling. Sometimes it is referred to
b other names such as network marketing, member-get-member (MGM) programme and affiliate
marketing. Only firms which do not mind experimenting in reaching out to the consumers practise
it. Avon, Amway, Oriflame, are among the largest MLM outfits in the world. The Indian firm,
ModiCare also sells its range of household and personal care products through MLM.
How does MLM Work?
Amway is the example of MLM. The process begins with the recruitment of a core group of sales
personscum-distributors, who have to be introduced to the company by a sponsor. Each of these
distributors picks up products worth a certain sum, say Rs 1,000 at a time, and sells them directly
to the consumers. After they have sold their first consignment they are allowed to pick up their
next lot.
The distributors are not expected to make all sales on their own. Instead, the system envisages the
distributor recruiting a second rung of distributors. The distributor earns commissions at two
level . The first is the commission that accrues to her on what she sells by herself, and is made up
of the difference between the distributor price and the consumer price. The second is the share that
accrues to her out of the commission earned by the distributors at the lower rung, whom she has
recruited and trained. The value of the products a distributor has sold is worked out in the form of
point value (PV). The distributor can, if she so wishes, charge a lower price than the one suggested
by the company, foregoing a part of her commission.
MLM’s plus points The plus points of direct selling in general, discussed earlier, are plus points of
MLM as well. It’s specific plus point is that it helps the direct sellers grow rapidly. Because of the
unique multi-level nature of the distribution, an MLM distribution network is able to offer quick

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growth, continuously, and automatically. Multiplication and growth are inherent to network
marketing.
MLM’s drawbacks MLM shares all the drawbacks of direct selling. It suffers some additional
drawbacks on account of its peculiarity. First, like the classic chain letter, MLM is a winner only
so long as the network keeps growing unbroken. But, should the link snap at many a place, the
entire distribution cum sales pyramid will suffer a setback. Second, in the MLM system, the
distributors are, quite often, perceived as an irritant by the prospects. Third, distributors are also
customers in most cases; losing distributors will amount to shrinkage of the customer base. Fourth,
in the MLM system, the firm cannot have control over the sales persons to the desired extent as
they are not employees of the company. Fifth, in the MLM system, the sales persons-cum-
distributors often reduce prices arbitrarily in order to meet their sales targets. Sometimes, some
sales people use ‘high-pressure’ tactics. As a result, the equity of the brand suffers. Many sales
persons who join the network buy the required lot of products just to reach the required level in
the hierarchy and to keep going in the network. They may be just storing them. Moreover, sales
forecasting is usually more difficult in the MLM method. So, incidence of mismatch between
supplies and sales, and consequent piling up of inventories will be more in MLM.
9. Network Marketing
The student may often come across the term network marketing in the direct-selling context. It
needs to be clarified that this term is used in two different senses. Some use it to denote MLM;
others use it to denote independent direct selling by third-party outfits, which direct sell others’
products for a commission. To avoid confusion, it is better to avoid the expression network
marketing, and use the two distinct expressions, MLM and ‘independent direct selling’.
10. Viral marketing
Viral marketing refers to individual-to-individual transmission of a message which has the
capacity to spread so exponentially fast, turning it into a mega-phenomenon. The term is now used
generally to describe a sort of Internet word-of-mouth wave. According to one Web version, the
term was first coined in 1997, by Steve urvetson, a venture capitalist, to describe Hotmail’s
strategy of tagging every mail with an ad soliciting new users for its services. This is what made
Hotmail the mega success. Viral marketing can be thought of as the Internet age variant of Multi-
Level Marketing.

16.8 Personal Selling

The terms ‘personal selling’ and ‘Salesmanship’ are often used without distinction. However there
are some vital differences between the two terms.
Salesmanship is Seller initiated effort that provides prospective buyers with information and
motivates them to make favourable decisions concerning the seller’s products or services.
‘Personal Selling’ is a highly distinctive form of promotion. It is basically a two way
communication involving not only individual but social behaviour also. It aims at bringing the
right products to the right customers. It takes several forms including calls by company’s sales
representative, assistance by a sales clerk, an informal invitation from one company executive to
another. It is employed for the purpose of creating produce awareness, stimulating interest,
developing brand preference, negotiating price etc.
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Thus keeping in view the diversified nature of personal selling, we would discuss in this unit the
growing importance of personal selling, its changing role, functions and process. Personal selling
is one of the four major components of the promotion mix, the other three being advertising, sales
promotion, and publicity.
Personal Selling is:
• Providing analytical, consultative, and advisory service to clients/ customers
• Helping buyers to buy wisely and bringing benefits to them with every purchase
• Creating value satisfaction for both the customers and the firm
• Achieving a Win-Win result, utilising human psychology
• Coming together of a solution seeking customer and a problem solving salesman, ultimately leading
to a solution to the customer’s problem

• The technique by which the salesman and customer together think through the proposition given by
the salesman on the prospect’s needs and reach a mutually profitable decision.

16.9 Role of Personal Selling

Personal selling plays a key role in value communication. Personal selling is described as the act
of persuading a customer to buy a product, through having personal communication with him. It is
easy to discern that communication is the essence here. And, it would thus be appropriate to view
personal selling as the task of communicating value to customers. In addition to communicating
the value to the customer, it brings back to the firm the communication from the customer. It
therefore helps in enhancing the value that is ultimately provided to the customer.
While the other three components of promotion - advertising, sales promotion, and publicity - also
perform the value communication task, personal selling performs the task in a unique way. The other
three cannot match personal selling in this respect. The latter carries out the communication directly,
while the other three do it indirectly. It does individual and personal transfer of information in
contrast to the mass and impersonal transfer the other three do. If we take advertising as the example,
it is a one way, non-personal communication to loosely targeted consumers. In contrast, personal
selling is a two-way, and personally exchanged communication between the sales person and the
individually identified customer. With it, the quality of customer interaction is far superior as
compared to the other components. It is also more flexible. It can tailor the communication matching
with the needs and behaviour of individual customers. It can discern, even while the persuasive
process is on, the customers’ reactions to a particular proposition and make the required adjustments
on the spot. It can minimise wasted effort as it focuses on properly targeted, individual customers. It
can provide all the required product information to the customer and can effectively convince him. It
reduces the time-lag between introducing a product through the mass media and the actual selling of
the product. It can also provide customer service and collect market intelligence. In sum, it is a
unique and versatile component of the communication mix of a firm.

16.10Nature, Significance, and Scope of Personal Selling

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Actual Sale is Its Goal: The goal of personal selling is to actually make a sale. Advertising, the
other major component of promotion, has a less direct goal; it attracts attention, creates interest,
provide information, and arouses desire, but seldom stimulates the actual buying action on its
own.
Performs Several Tasks: The other three components of promotion just promote, meaning they just
perform the communication task. Personal selling performs a variety of tasks including
communication.
It locates buyers, communicates face to face, answers questions, overcomes objections, provides
service concludes sale, takes information back and forth, and wins friends and clients for the
company.
Serves As a Competitive Advantage: In the marketplace we often see companies feeling
threatened more by the competitor’s better quality sales force than by their better quality products.
Naturally a superior position in personal selling is viewed by firms as a strong competitive
advantage.
Salesmen, a Unique Resource of the Firm: As personal selling performs the value
communication/ value delivery job in a unique way, salesmen become a unique resource of the
firm. Properly trained, motivated, and managed, they in fact become a versatile resource.
An Expensive Resource, As Well: Salesmen are not only a unique resource of the firm, but an
expensive one as well. Reaching a given number of customers through the personal selling route is
far more expensive as compared to reaching them through the mass communication route. Even
though personal selling can minimise wasted effort, using a sales force for selling is relatively
costly. Personal selling, with its’ face to-face interaction with customers, no doubt confers
flexibility, but the flexibility comes at a cost.
In many companies, personal selling is the largest single operating expense, sometimes exceeding
10 to 12 per cent of sales. In contrast, advertising costs on an average 1 to 3 per cent of sales. It is
only because of its efficacy that firms vote for personal selling despite its higher cost. Companies,
of course, try to reduce the real cost in this endeavour by increasing the salesmen’s productivity
through better selection, training, supervision, motivation, and compensation.
The Essence of Personal Selling
It is often said that Getting customers and Keeping Customers is the task of personal selling.
Personal selling does consist of selling to the firm’s existing customers plus locating/creating new
customers. It accomplishes the second part of the task in two ways - it converts the ‘non-users’ of the
product into users and ‘the firm’s customers’ and it also converts ‘competitor’s customers’ into ‘the
firm’s customers’.

16.11 The Personal Selling Process

The elements of the personal selling process are:

1. Prospecting
Prospecting refers to locating prospective buyers. Good salesmen do not entirely rely on existing
customers, but seek out new ones. They constantly search for ‘prospects’ or potential customers
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and rope in as many of them as possible. Prospecting is the first step in the selling process
whenever new customers are sought.
Identifying Prospects and Gathering Leads: Although the company may supply some leads, the
salesmen must have the skill to develop their own leads. They can develop leads from many sources
such as:
• Current customers
• Dealers
• Suppliers, non-competing salesmen, banks, credit agencies and clubs/similar organisations.
• Published data sources like directories, telephone yellow pages, etc.

The ‘prospecting’ will be more effective if the salesmen systematically gather market intelligence
and analyse the information thoroughly.
Qualifying the Prospects and Analysing Their Purchases: Salesmen have to screen the leads,
throw out the poor ones and pick the better ones for further probing/making sales call. He could
call up or write to prospects before deciding whether to make a sales call. Prospects should be
qualified by evaluating their financial ability, likely volume of purchase, specifications adopted,
likelihood of continuous business, etc. The leads can also be categorised into hot leads, warm
leads, and cool leads, depending on their potential to become customers.
Websites can be Used for Acquiring and Qualifying Leads: Salesmen can use websites of
companies/ social network sites /blogs for acquiring leads and qualifying the prospects. A lot of
details about the prospects can be collected by perusing the sites. Website analysis is a valuable
tool and can help select exactly those who warrant a personal sale call. By the same token, it can
help list those who do not warrant a call. In some cases, the site can even take care of the actual
processing of the business.
2. Pre-approach
Pre-approach consists of planning and preparation. The salesmen have to meticulously plan the
sales presentation. They must go through customer characteristics and the sales context as part of
the preparation. Need-exploration is an especially important part of Pre-approach. The sales
presentation has to be dovetailed with the exact needs of the customer. Securing
appointments/sales interviews from the customer is also a part of the preparation.
3. Approach
Approach refers to the preliminaries and the initial part of the interaction in sales interviews
before the substantive sales presentation commences. In particular, it includes the opening
remarks in the presentation and the opening style adopted by the salesman in selling to the given
customer.
In general, a consultative style of selling is superior to a totally controlled one. The approach should
facilitate this requirement.
4. Sales Presentation
Now, the salesman gets to the actual delivery of the sales story/message/demonstration. Listening,
probing, use of questions, persuasive interceptions are integral elements in the process. Handling

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and overcoming objections is also a part of it. The salesman must involve the customer in the
presentation.
The AIDA Approach: The AIDA approach - Attention, Interest, Desire and Action sequence -
makes marketing communications more effective. The AIDA approach can be of help in personal
selling presentations too. The salesmen must develop and render their sales presentation in such a
manner as to attract Attention, gain Interest, arouse a Desire and result in Action on the part of the
customers. We also saw, in the chapter on Advertising, the modified five-stage model on the
adoption process - Awareness, Interest, Evaluation, Trial and Adoption, and the extended six-stage
one - Awareness, Knowledge, Liking, Preference, Conviction and Purchase. The ideas contained
in these models too have relevance in sales presentation. Basically, the salesman must remember
that he sells a mental concept, not a mere product.
5. Negotiation
Negotiation (where applicable) is also an element of the personal selling process.
6. Post Sale Service
Post-sale service to the customers is another important element. Salesmen must promptly respond
to service requests from the customers and follow them up with concerned
individuals/departments of the company. In his article titled, ‘After the sale is over’, Professor
Levitt says that salesmen have to go beyond the immediate goal of the sale. He emphasises the
need for developing professional partnerships between the seller and the buyer. Only when this is
achieved can the buyer-seller relationship bring profits to the firm. It is not enough for a salesman
to create a satisfied customer. There is a need to retain a satisfied customer through-post sale
service.
7. Relationship Selling
Salesmen must excel in relationship selling. They must discontinue the usual practice of
concentrating on maximizing the number and size of sales transactions. These are no doubt
important; but the relationship is even more important. Salesmen must develop a long-lasting
relationship built on trust with customers, especially in relation to the larger and more profitable
accounts. Selling situations cannot be viewed as onetime encounters. This is particularly true with
organizational business buyers. Management of relationships with customers is a major
responsibility of the salesperson. For succeeding in this, he must have intimate knowledge about
the customer, his business, and his background. Levitt explains these ideas nicely in the article
referred to above.

16.12Summary

Direct Marketing Association (U.S. A.) defines direct marketing as “an interactive system of
marketing which uses one or more advertising media to affect a measurable response and/or
transaction at any location.” The characteristics which distinguish Direct Marketing from all other
marketing methods is its efficiency. The ability to swiftly determine the success or failure of any
effort by simply counting the pre-coded responses enables the Direct Marketers to test their
programmes on a small scale before incurring any major expenditure. It provides the advantage of
being able to target, personalise and get immediate action. Direct Marketing is most effective in
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directing a marketing effort only to likely prospects, Personalisation means the ability to speak to
potential customers as individuals and not as impersonal members of a vast audience. This has
been made possible through computerised printing techniques which enable a Direct Marketer to
store, and later recall in a printed format, personalised information on each member of the
audience they wish to reach.
Essentially, the purpose of Direct Marketing can then be expressed as a three step process:
1. Isolate your customers
2. Build a continuing relationship
3. Build a profitable relationship
The terms ‘personal selling’ and ‘Salesmanship’ are often used without distinction. However there
are some vital differences between the two terms. Personal selling is one of the four major
components of the promotion mix, the other three being advertising, sales promotion, and
publicity. Personal selling is:
• Providing analytical, consultative, and advisory service to clients/ customers
• Helping buyers to buy wisely and bringing benefits to them with every purchase
• Creating value satisfaction for both the customers and the firm
• Achieving a Win-Win result, utilising human psychology
• Coming together of a solution seeking customer and a problem solving salesman,
ultimately leading to a solution to the customer’s problem
The elements of the personal selling process are:
• Prospecting
• Pre-approach
• Approach
• Sales presentation
• Overcoming objections
• Negotiation
• Closing
• Post-sale service/maintaining relations

16.13Self Assessment Questions

1. Differentiate Direct Marketing from Direct Response Advertising and Direct Mailer.

2. What are the characteristics and advantages of Direct Marketing?

3. Discuss the changing role of personal selling.

4. Personal selling is a two-way communication best suited to a company marketing

consumer product with a poor brand loyally. Discuss.

5. Enumerate various types of Direct Marketing Tools.

6. How can Personal Selling be performed?

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16.14Reference Books

- V. S. Ramaswamy, S Namakumari; 2009; Marketing Management; MacMillan Publishers

Pvt Ltd.
- Kotler, Keller, Koshy, Jha; 2009; 13th Edition; Marketing Management: A South Asian
Perspective.
- Eugene M. Johnson, David L. Kurtz, Eberhard E. Scheuing, 1986, Sales Management,
Concepts, Practices, and Cases, McGraw Hill: Inc. USA (Chapter-4).
- Frederic A. Russell, Frank H. Beach, Richard H. Buskirk, 1985, Selling, Principles and
Practices, McGraw Hill Book Co.: Singapore (Chapters 7-15).
- J.C. Gandhi, 1985, Marketing: A Managerial Introduction, Tata McGraw Hill Publishing Co.
Ltd.: New Delhi (Chapter 9).
- S. Neelamegham, 1988, Marketing in India Cases and Readings, Vikas Publishing House
Pvt. Ltd.:, New Delhi.

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 Unit - 17 : Rural Marketing

Structure of Unit:

17.0 Objectives
17.1 Introduction
17.2 Meaning and Definition of Rural Marketing
17.3 Evolution of Rural Marketing
17.4 Characteristics of Rural Marketing
17.5 Factors Contributing to the Change in Rural Marketing
17.6 Growing Significance of Rural Marketing
17.7 Problems in Rural Marketing
17.8 Challenges before Rural Marketing
17.9 Suggestions
17.10 Summary
17.11 Self Assessment Questions
17.12 Reference Books

17.0 Objectives

After completing this unit, you will be able to:

• Understand the concept of rural marketing;

• State the meaning and definition of rural marketing;
• State the evolution of rural marketing ;
• Enumerate the nature and characteristics of rural marketing ;
• Outline the factors contributing to the change in rural marketing ;  Learn and
appreciate the growing significance of rural marketing;
• Know about various challenges before rural marketing;

17.1 Introduction

Rural marketing is always defined in a constricted way by only focusing on marketing of

agricultural produce. Marketing of agricultural produce has received sufficient consideration by
the governments both Central and state. The outcome was better prospect for agricultural
producers who got a better share of the consumers’ rupee. The rural market of India started
showing its potential in the 1960s. The 70s and 80s witnessed its steady development, which
provided opportunities to most of the companies to explore their horizons in new market with new set
of segments. Rural marketing concentrates on delivering manufactured or processed inputs or
services to rural producers or consumers so as to cover the huge size of the uncovered rural
market.

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The beginning of farming in a more profitable and market-oriented way was lead with the help of
modern agricultural technology which necessitated the use of manufactured inputs like, pesticides,
fertilizers of good quality and different variety of seeds. Modern way of farming and use of
machine paved the way for many related companies to capture rural market. Farming in a
mechanized way required lot of inputs like tractors, threshers.etc and these industries got a chance
to enter rural market. Thus, the concept of rural marketing was widened to some extent to consider
marketing of both agricultural produce as well as the inputs necessary for its, production.
The initiation of market-oriented farming along commercial lines with improved and superior
technology and mechanization resulted in increase in rural incomes. Socio-economic changes in
villages have diverted villagers thinking. This modification has opened door for many marketers
in India. ‘Go rural’ has become the slogan for most of the companies. Earlier rural people were not
considered by the companies due to its low-income level, low literacy rate, and high cost because
of improper infrastructure facilities.
It gave chance, to many industries to tap rural consumers as their ability to purchase goods and
services increased. “The rural consumer is very sensitive and the rural market is exciting. With the
passage of time growth of rural market will increase, and will out pass the growth of urban
market. Rural consumers are dealt in a different way by the companies as compared to urban
consumer as they both have different need, taste, opinion etc.
Many companies started entering the rural market slowly by offering various consumer, durable
goods and services. Various activities were undertaken by the Central and state governments for
the development of rural people like family welfare programmes, and television network etc.
Though, the purchasing power of rural people have gone up, still they have become very choosy
in their purchase of two wheelers, T.V, radios, wrist watches, cooking gas etc.
The rural and urban buyer differs in many aspects such as: Age and life-cycle stage, Occupation,
Economic situation, Personality and self concept etc. The most important disparity in rural and
urban market is, rural market is underdeveloped and the consumers are not much aware about the
fashion, trends and brands in comparison to the urban consumers. Communication about the
product to rural consumer is different from that of urban consumer. Word of mouth, radio, melas
and theatres are few of the medium of promotion in rural market whereas, television and print
media advertisement, hoardings are the leading source of promotion for urban market.
Therefore, the vast unexploited potential of the rural markets is growing at a rapid pace. With over
70% of India’s population residing in rural areas, capturing these markets is becoming one of the
most lucrative options for all sectors. The policies framed by the government are such which
favour the rural development programmes. Thus, with the rural markets bulging in both size and
volume is a great opportunity for all the sectors.

17.2 Meaning and Definition of Rural Marketing

“Rural marketing can be seen as one of the important function which manages all those activities
concerned in assessing, motivating and converting the purchasing power of rural people into an
effective demand for specific products and services, so as to create satisfaction and enhance
standard of living of rural people by achieving the goals of the organization.” Thus, the emphasis

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of rural marketing is not only to provide goods and services to rural people but also to enhance
their standard of living by providing good quality products with varieties of option.
Rural means different to different people. Snapshots of some definitions are as follows:

The Census of India defines rural as any territory where the population density is less than 400
per sq. km, and where at least 75 per cent of the male working population is engaged in
agriculture, and where there isn’t any municipality or board. There are about600, 000-odd villages
in India. Some companies like
Hindustan Lever and ITC, FMCG Sector would define rural as any place with a population below
20,000.
The National Sample Survey Organization (NSSO) defines ‘rural’ as follows:

1 An area with a population density of up to 400 per square kilometre,

2. The Villages with clear surveyed boundaries but no municipal board,
3. A minimum of 75% of male working population involved in agriculture and
allied activities.
National Bank for Agriculture and Rural Development (NABARD): All locations irrespective
of villages or town, up to a population of 10,000 will be considered as rural. However,
Characteristics of village and towns are not defined.
Planning Commission of India: The town’s population Up to 15,000 is considered as rural but, the
town characteristics are not defined.
LG Electronics, India: The rural and semi urban area is defined as all cities other than the seven
metros.
Defining rural market is a difficult thing. Each one defines rural as per their ease. It is sarcastic
that the census of India defines ‘rural’ in context of all that is not urban considering that there were
only villages before the development of cities and towns .An urban area is one which has a
minimum population of 5000 people, density of at least 400 people per square km and 75 percent
of working population occupied in nonagricultural activities.
The developmental programmes undertaken by the Central and state governments have brought
about an overall development, the advent of electricity in rural area has opened up the rural market
for many companies manufacturing electrical goods like bulbs, radios, table and ceiling fans etc.
Now, it is not difficult to find well-known brands of biscuits, tea, shampoo sachets, toilet soaps
and detergents in rural area. Even the products like television sets, transistor radios, mopeds, and
table and ceiling fans are also made available to rural people.
The rural consumers are classified into the following groups based on their economic status:

1. The Affluent Group: In this group only those farmers are considered who are rich and
have the purchasing power. But, they do not form a demand .They have the ability, but not
the willingness. Such farmers are found mostly in Punjab producing wheat and rice
merchants of Andhra Pradesh.

2. The Middle Class: Farmers producing sugar cane in UP and? Karnataka fall in this
category. It is one of the vast segments for manufactured goods and is growing very
rapidly.
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 3. The Poor: This segment is large in number with very less purchasing power. But they can
gradually move towards middle class as they receive the grants from government and reap
the benefits of many such schemes. They are the farmers from Bihar and Orissa.
Communicating to Rural Audiences
The key to any successful marketing campaign is communicating the message in a right way. In
rural markets, it is said to be difficult as people are not literate. It is very important to
communicate the message in a right way. Rural marketing involves the process of developing,
pricing, promoting, distributing product and services for rural market. The transaction between
rural and urban market helps in achievement of organizational goals and satisfaction of customer.
It is a marketing process wherein the transactions can be two way:

1. Urban to Rural: The selling of products and services by urban marketers in rural areas so
that it is consumed by rural people which may include: FMCG Products, Consumer
durables, modern products required in farming etc.
2. Rural to Urban: The selling of agricultural produce by the farmer through some agent in
urban market. Some of the important items sold from the rural to urban areas: fruits and
vegetables, milk and related products, forest produce, spices, etc.

3. Rural to Rural: The activities that take place between two villages. These activities may
relate to the areas of expertise that particular village has by sharing it with other villages. It
includes selling of agricultural tools, cattle, carts and to other villages.

17.3 Evolution of Rural Marketing

In 1947, the concept of rural markets was practically non-existent. The consumption of rural
people was dependent on what they produced. The manufactured goods (products) they bought
were very few such as salt, tea, tobacco, kerosene, gold and silver ornaments etc. For shelter they
were depended on the materials available in the village, for clothes the weaver; for vessels, the
potter. They went to local vaidyas for medicine and maternity. For transport and ploughing, there
was the oxen and cow. For water, they used the pond or well or entire agriculture was dependent
on monsoons.
Part I (Before 1960): Rural marketing referred to the marketing of rural products in rural & urban
markets. It was treated as identical to ‘agricultural marketing’.
During this period the main area of discussion was agricultural produces like food grains and
industrial inputs like cotton, oil seeds, sugarcane etc. The supply-chain activities of firms
providing agricultural inputs and of artisans in rural areas received less attention. The local
marketing of products was done which included products like bamboo baskets, ropes, window and
door frames, and small agricultural tools like ploughs by various sellers like black smiths,
carpenters, cobblers, and pot makers etc. It was basically an unorganized market which was
dominated by banias and mahajans (local business people) in rural market.
Part II (1960 to 1990): In this period, green revolution resulted and farming was practiced in a
more scientific way like irrigation facilities, use of fertilizers, pesticides, high yield variety seeds,
tractors, power tillers, pump sets, sprinklers reached the rural consumer and changed the scenario
of many poor villages into affluent business centers. This period also saw an upcoming of various
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companies like M&M, Escorts, Eicher, Sriram fertilizer and IFFCO to support and promote other
village industries.
In this perspective, marketing of agricultural inputs took the importance. Two separate areas of
activities had emerged- during this period ‘marketing of agricultural inputs’ and the conventional
“Agricultural Marketing”. The marketing of rural products received considerable attention in the
general marketing frame work. The formation of agencies like Khadi and Village Industries
Commission, Girijan Cooperative Societies, IFFCO, etc., the government also paid special
attention to promote these products. The outcome was products like handicrafts, handloom
textiles, soaps, safety matches, crackers etc, did well in the urban market on a large scale from
rural areas.
Part III (After Mid 1990s): In this phase most of the household consumables and durables
products in rural market were not given much attention in the beginning because of the two
obvious reasons. The financial condition of the country was such that the rural people were not in
a situation to buy such products. Secondly, the foreign firms were not allowed to operate in Indian
market. With the passage of time Indian economy was opened up and gave entry to many
companies. The small villages/hamlets were broadly spread making reach difficult and expensive
consequently. Rural markets were seen as an addition to urban market but sometimes ignored. In
the year 1990s, India’s industrial sector did very well. It gave rise to increased GNP. The central
and state government’s developmental programmes in rural markets witnessed an all round socio-
economic progress. Rural marketing represented the necessary activity for attracting and serving
rural markets to fulfil the needs and wants of persons, households and occupations of rural people.
Part IV (21st century): In 21st century it was realized that if an organization wants to tap the real
potential of the rural market, it needs to make a long-term commitment with this market.
Its approach & strategies was not only to sell products & services, but also to create a need to make
it happen.
The main aim of rural marketing was to improve quality of life by satisfying the needs & wants of
the customers, by providing good products or services, and an integrated solution to it. The
marketers have realized that major untapped market with increase in purchasing power, the
changing life style and consumption pattern of villagers with increase in education, social
mobility, improved means of transportations and communication and other penetrations of mass
media such as television and its various satellite channels lies in rural area they are making
specific efforts to reach the rural markets.
The competition, in urban markets is high, customers in urban area demand new product every
now and then, made the companies to imagine about new potential markets. Thus, Indian rural
markets have trapped the consideration of many companies, advertisers and multinational
companies. According to a recent survey conducted by the National Council for Applied
Economic Research (NCAER), the purchasing power of the rural people has gone up due to
increase in productivity and better price commanded by the agricultural products. The purchasing
power of rural markets remains unexploited and with the mounting reach of the television, it is
now quite easy for the marketers to capture these markets.
Rural marketing has become the latest mantra of most corporate. Companies like Hindustan
Lever, Colgate Palmolive, Britannia and even Multinational Companies (MNCs) like Pepsi, Coca
Cola, L.G., Philips, Cavin Kare are all eyeing rural markets to capture the large Indian market.

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17.4 Characteristics of Rural Marketing

The frame work of Rural Marketing is such that it involves reaching the rural customer,
understanding their needs and wants, supply of goods and services to meet their requirements,
carrying out after sales service that leads to customer satisfaction and repeat purchase/sales. The
liberalization and globalization of the Indian economy have given an added advantage to
sophisticated production, proliferation and mass distribution of goods and services.
Some of the important features or characteristics of Rural Marketing in India Economy are being
listed below:

1. Large and Scattered Market: The rural market in India is vast and scattered and offers
an excess of opportunities in comparison to the urban sector. It covers the maximum
population and regions and thereby, the maximum number of consumers. It is scattered
into a number of regions and less number of shops are available to market products.

2. Major Income of Rural Consumers is From Agriculture: Agriculture and linked

activities continue to be the main source of income for the rural population. Agriculture is
the major source of income for about 77% of the population.10% of rural population is
engaged in business nonagriculture labour contributes to 9% of population, salary earners
(2%) and not gainfully employed (2%). It is clear that rural affluence depends upon growth
and development of agriculture. But, the income is seasonal in nature and its fluctuation
depends on crop production.
3. Standard of Living and Rising Disposable Income of the Rural Customers: The major
portion of rural population is below poverty line with a low literacy rate, low per capital
income, low savings, etc. But, the good monsoon increases their earning capacity,
government regulation on tax and providing goods at a very reasonable rate have increased
disposable incomes of rural people. With the passage of time awareness in rural customer
has increased and they spend money to get value and is aware of the happening around
him.

4. Traditional Outlook: Rural people do not accept change very rapidly as they are bound
with their own way of traditional living. Change is a continuous process but it is accepted
very slowly and gradually by rural people. This is gradually changing due to increase in
literacy especially in the youngsters who have begun to use bicycles instead of carts.

5. Rising Literacy Levels: It has been estimated that the rural literacy level is 36%
compared to 62% in urban areas. Literacy is one of the most important factors in
increasing awareness and knowledge about the technological changes. Hence, gradually
awareness is increasing and they are making themselves educated about new technology
around them and aspiring for a better lifestyle.
6. Diverse Socioeconomic Background: As the rural population is scattered
geographically .In every village there is diverse socioeconomic background, which
ultimately affects the rural market.

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7. Infrastructure Facilities: The infrastructure facilities like roads, warehouses,
communication system, financial facilities, electricity, telecommunication facilities are not
at all their or is very poor in rural areas. Hence, it is a challenging task for rural marketers.
As making rural people aware about the product and distributing these products to rural
market is a difficult task due to improper or poor infrastructural facilities. Therefore,
physical distribution becomes costly.
• Media Reach: The media reach in rural household is very low. The large no of
rural population do not have TV, Radio, even they do not have access to print media. It
indicates that the marketer has to consider rural specific promotion media and methods to
reach the villagers.
• Communication Facilities: Many villages in India do not have the facility of
telephone even today. So there is very less possibility of internet access.
• Transportation Facilities: Near about 50% of the markets are not connected by
road. Most of the roads are kachha and cannot be used during rainy season. Many farmers
use bullock cart for transporting their produce from village to the market. It is a very time
consuming way of transporting goods from one place to other.
• Rural Electrification: The main objective is to provide electricity for agricultural
operations and for small industries in rural areas. Some villages have electric supply and
some are left this, has increased the demand for electric supply and has increased the
demand for electric motors, pumps and agricultural machinery.
• Medical Facilities: Medical facilities are very inadequate and the rural people
have to travel long distances for getting medical treatment.

17.5 Factors contributing to the change in Rural Marketing

The factors contributing to the change in rural marketing are as follows:

1. Green Revolution: The succeeding five-year plans have helped in improving agricultural
productivity.
The use of machines, multiple cropping and development of related activities like dairy,
fisheries and
other commercial activities have increased disposable income of rural consumers.
Electricity have reached to many villages, but still few villages are remaining Earlier entire
agriculture was dependent on monsoon, but today dependence have reduced. There is
also a shift from rain dependence to irrigation. Farmers have started getting more returns
for their crops. In this process, the dependence on monsoon has reduced, and in return
there has been increase in income for rural farmers.

2. Emerging Role of Bio-Tech. in Indian Agriculture Sector: It is very apparent from the
facts that Indian agriculture is very irregular in terms of yield when they can be regular,
When India compared with leading countries of the world like USA, Canada, Israel and
Germany in terms of yield of wheat and sugarcane it is lacking behind. The major
difference is in the applications of biotechnology. Bio-technology has very important role

239
 to play in so far as enhancement of agriculture yield is concerned. Many advance countries
have been making a wide use of bio-technology whereas in developing countries the
concept is not yet very known. In the era of globalization everything is becoming
competitive globally and therefore, the use of Bio-Tech. in Indian agriculture sector has
become need of an hour. Farmers, in rural areas have to be made aware and educated in
terms of use of Bio-technology. It will not only increase the productivity for our country
but also increase the income in the hands of the rural farmers.

3. Rural Communication: Near about 50 percent of the villages are today connected by
roads and can be accessed throughout the year. There are states, which are approximately
100 percent connected with the metal roads. In such a scenario companies like LG and
Samsung have already made their strategies for entering rural India. As per survey
conducted by Indian Market Research Bureau (IMRB) 77 percent of the villages have
exposure of TV network. Today villages are going for dish antennas and the marketers are
having opportunity to make rural people aware about the products through advertisements.
Some villages are about to be connected with telephone facilities in the near future and
already there are some villages, which avail this facility. Apart from this, internet is not a
far-away from rural people. Tata cellular has already entered into rural India by making its
first entry into Andhra Pradesh. Tata cellular has become India’s largest cellular company
to provide connectivity to rural areas.

4. Development Programmes: The central and state government plans have witnessed huge
investments in rural areas in terms of number of development programmes implemented
by the central and state Government. These programmes have helped rural people to
change their lifestyles. Some of these programmes are:
• Intensive Agricultural District Programme (IADP- Package Programme)
• Intensive Agricultural Area Programme (IAAP)
• High Yielding Varieties Programme (HYVP- Green Revolution)
• Drought Prone Areas Programme (DPAP)
• Small Farmers Development Agency (SFDA)
• Fisheries Development
• Integrated Rural Development Programme (IRDP)
• Jawahar Rojgar Yojna (JRY).
The above programmes are linked with agriculture and related activities but there are
certain other policies which are specifically created to raise the standard of the rural
people in the area of education, sanitation, medical checkups etc. Thus we can say that
rapid changes are taking place in rural areas in all spheres
5. Need-Product Relationships: Rural people have shifted to the use of different products
due to change in their literacy level, standard of living, awareness about products available
in market. For example:.

Table 17.1 : Need-Product Relationships and the Changes Happening in Rural India

Needs Old Products New Products

Brushing Teeth Neem sticks, Rocksalt. Toothpaste, tooth powder

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 Washing Vessels Coconut fiber, Earthy materials, Washing Powders, soaps
Brick Powder, Ash and liquids

Transport Horses, Donkeys, Bullock Tractors, Mopeds,

Cart Scooters, Motor cycles

Irrigation Wells, Canals, Wind Mills Bore-wells, Motors, Power

Generators, Pump .

Hair Wash Multani mitti ,Shikakai Shampoos and hair care

powder, Retha, Besan. Soaps.

17.6 Growing Significance of Rural Marketing

1. The focal point of marketers in India was the urban consumer and by large no specific efforts
were made to reach the rural markets. But now the scenario has changed with the increase in
purchasing power, scientific agriculture, and change in standard of living and consumption
pattern of villagers with increase in literacy rate, improved means of transportation and
various satellite channels the view of rural India about life has changed. Therefore, it is one
of the main reasons for growing significance of rural marketing.

2. The majority of Indian population resides in rural area i.e approximately 70% of the Indian
population lives in rural areas. This is said to be unexplored segment of India with huge
opportunities for company to explore.

3. The growing competition, saturated urban markets, and the new product demanded by the
urban customers, prepared the companies to consider about new potential markets. Thus,
Indian rural markets have trapped the attention of many companies, advertisers and
multinational companies. Rural marketing has become the latest mantra of companies like
Hindustan Lever, Colgate, Palmolive, Britannia, and even Multinational Companies (MNCs)
like Pepsi, Coca Cola, L.G., Philips, and Cavin Kare are all wants to capture the large Indian
rural Market.
4. It involves delivering of manufactured or processed products or services to rural producers
and consumers with the help of branded companies.

5. The growth in rural markets of India leads to overall growth in economy of our country.

6. The rural market in India has highly influenced many factors such as sociological and
behavioral factors in India and have also increased the consumption of manufactured
products.

7. The urban market being fully explored the companies do not find scope for expansion and
there lies an opportunity in an unexplored rural market for many brands.
8. The rural market in India is immensely scattered and offers a abundance of opportunities
when

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 compared to urban marketing as the major portion of India’s population is in rural area.

9. Improvement in infrastructural facilities in rural areas of India such as villages being

connected by
roads, electricity in some villages, telephone facility in some villages have already started
with low penetration rates in rural areas, all these create a marketing opportunities in rural
areas.

10. Rural population always have a curiosity of going urban in terms of lifestyles, habits,
consumption
pattern of various goods and service made the marketer to build a strong distribution channel
and pricing strategies by keeping in mind the rural consumer.

11. Remittances from Abroad as many households in rural India have one of their family
members
abroad, mostly in Gulf countries. People working there send their saving to their families
in India, which is an additional source of Income which increases the purchasing power of
people and creates an opportunity for companies.

12. The Indian rural market with its vast size attracts more multinational companies.
Thus, “Rural market has lot of potential in India as it remains untapped so much so that even one
percent increase in India’s rural income translates to Rs 100,000 million of buying power,”

17.7 Problems in Rural Marketing

The rural market does offer a vast untapped potential, and seems to be rosy, but it is not that easy
to operate in rural market because of several problems in the area of market, product design and
positioning, pricing, distribution and promotion. Companies need to understand rural marketing in
a broader manner not only to survive and grow in their business, but also as a means to the
development in rural economy. Rural marketing requires lot of time and requires considerable
investments in terms of developing appropriate strategies with a view to tackle the problems. The
major problems faced are:

1. Under Developed People: The old tradition still prevails in rural society and is bound by,
old customs, habits and practices. Technology does have an impact on rural society but to a
very small number of people the old beliefs of working still continues. The villagers are
neither trained nor oriented and they carry a philosophical belief. They believe that
whatever has happened or happening is due to God and they cannot do anything. Per capita
income in village is very low .Therefore; consumption pattern of rural population is low as
compared to the urban population. Most of the farmers have a small chunck of land that
they hold. This makes farmers thinking small and there is no use of machinery or modern
scientific farming techniques. This also gave rise to a narrow mind set.

2. Under Developed Market: In rural area major population is below poverty line and in
addition, many villages are draught prone. Rural population does not have adequate
banking and credit facility for their transaction. Banking facility is required to have credit

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 facilities to carry optional stocks. Brands available in rural market are very few and rural
consumer are left with a less option as compared to urban market, not only this there are
duplicate copies of the brand available in the market which makes rural consumer
apprehensive in buying branded products.
The standard of living of rural population is very low and they do not adopt changes taking
place in the environment easily. The underdeveloped markets post a large challenge to the
rural marketer.
3. Lack of Proper Physical Communication Facilities: The communication facilities in
rural areas are very low as compared to urban areas. In rural area very few percentage of
population gets modern communication facilities. Print media reaches rural Indian but in
very low percentage. Radio or transistors are popular in rural India due to fact that radio
has a very vast coverage in all parts of India. Television is becoming popular since the last
two decades but only 25 percent of villages are covered by transmission. Movies are
becoming popular especially in the rural population. The villager has to travel long
distances to go to a cinema hall. In the era of globalization villagers still depend on post,
telegrams and phones for their communication needs.
The communication in rural markets suffers from a variety of constraints. The literacy rate
in the rural consumers is very low. The low levels of literacy, the tradition-bound nature of
rural people, their cultural barriers and their overall economic backwardness add to the
difficulties of the communication task.
Nearly fifty percent of the villages in the country still have kaccha roads. Physical
communication to these villages is very costly. Even today most villages in the eastern
parts of the country are inaccessible during the monsoon. Moreover, many villages in the
country have no access to telephones.

4. Media for Rural Communication: The communication in rural area can be bifurcated in
two categories: Traditional and Mass.
The traditional media reaches rural village very effectively. The simple forms of
entertainment with proper advertisements are combined to get the expected results. The
advertisements should be displaced in such a way that villagers take a notice of it. It is less
expensive method but retention of advertisement or message is less as it depends mostly
on the skills of the performers and coordination of the campaign company’s.
Some of the traditional media are puppetry, demonstrations and exhibitions, folk theatre,
wall paintings and cut outs, postcards, posters and handbills .But, all of them with some or
the other limitation which do not create much impact on the minds of rural consumer.
The Mass media is becoming popular as it has technological influence, innovation and it
has created impact on rural minds. The advertisers are using language which rural people
understand. The media is used to show the functioning of products, functions and benefits
in an effective manner for attraction and retention. Some of the mass media are word of
mouth, print, radio, cinema theatres, television, and video on wheels.
It has been projected that all organized media in the country put together can reach only 30
per cent of the rural population of India. The print media covers only 18 per cent of the
rural population. The radio network, not practically covers 90 per cent. TV is well-liked,

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 and is an ideal medium for communicating with the rural masses. But, it is not available in
all interior parts of the country. It is estimated that TV covers 20 per cent of the rural
population.

5. Dispersed Market: In country like India the structure of rural area is scattered which
creates problem for many companies to tap them. Therefore, it becomes difficult to make
sure about the availability of a brand all the rural areas. The scattered nature of the villages
increases distribution costs, and their small size affects economic viability of establishing
distribution points. Advertising in such a highly heterogeneous market, which is widely
spread, is not only difficult but very expensive.

6. Low per Capita Income: Per capita incomes of rural population are low when compared
with urban population. In addition, Jamindari system prevails in rural area because of this
distribution of income in villages is not true. The landlords in village are rich and they
enjoy large incomes and lead an spendthrift life whereas majority in villages have low
incomes, which is seasonal in nature. In addition, the rich farmer with his money and
power gets political power. Political power brings in more money. The rich becomes richer
and the poor get poorer.
It is a challenge for marketer to decide about quantities of product to be stocked,
distribution frequency, package size and a host of connected issues. More poor people live
in villages and overall income levels are low. However, demand for goods in rural markets
depends upon the agricultural situation, as agriculture is the main source of income for the
people in rural area and they depends greatly upon the uncertain monsoon. Therefore the
demand is not stable or regular. Hence the per capita incomes are low compared to the
urban areas.

7. Storage: A storage function is necessary because demand and supply rarely match. Most
of the agricultural commodities produced are seasonal in nature, whereas demand for them
is continuous.
The function of storage starts from the product produced in the farm till it reaches the
consumer. Agricultural produce is vast and in large quantities. The storage space required
is large. The storage space required for bulk storage of 5000 MT is one acre. The Storage
facility is low and therefore cannot cope up with seasonal requirements.
There is no choice left with Indian farmers but to store in the open due to lack of storage
space.
The storage should be proper so that the grains are clean, protected from rats and insects,
pests, birds and from thefts.
The points in storage are:
• At the farm
• In assembling
• While processor
• With wholesaler and
• At the consuming market place or with the retailer
The storage of perishable produce is a major challenge for marketers .The government has to
take necessary step in development of infrastructure and arranging proper storage facilities.
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8. Transportation: It is an important aspect in the process of bringing products from urban
production centers to rural areas. The transportation infrastructure is tremendously poor in
rural India. This is the that reason, most of the villages are not reachable by the marketers.
In our country, approximately 50 per cent of the villages are not connected by road at all.
Many parts in rural India have only kachcha roads. In the period of monsoons, these roads
become even unmanageable. Regarding rail transport, though India has the second largest
railway system in the world, many parts of rural India however, remain outside the rail
network.
Thus, transportation is a historical problem. For centuries, the agricultural produce is
handled by Bullock carts and camel backs. The system continues even as on date. The
reason behind this is roads or no roads connecting the village to the nearest market place.

9. Rural markets and Sales Management: It involves a greater amount of personal selling
effort compared to urban marketing. The salesman in rural area must also be able to guide
the rural customers in the choosing the products. The rural salesmen do not properly
inspire rural consumers to purchase product. The rural salesman has to be a tolerant
listener as his customers are extremely traditional with less or no knowledge about the
product. To convince a rural customer is time consuming processwhere salesman has to be
patience. The distribution channels in villages are extensive involving more intermediaries
and consequently higher consumer prices.

10. Seasonal Demand: The demand in rural area is seasonal, as the major source of income is
agriculture which is seasonal in nature Harvest season might see an increase in disposable
income and hence more purchasing power.
The festival and marriage seasons have considerable marketing activities in villages.
Festivals like Dassera, Deepavali, Baisakhi are peak demand seasons. The timely
movement of materials and communicating with rural masses is a challenge to the rural
marketer.

11. Product Positioning: Indian rural markets have distinctive features having scattered area,
varied and a developing market. The range of products available to this market will be
wide. The transportation and handling costs are high. Product positioning becomes a
challenge in view of the facts that:
• The income of the people in rural area vary greatly as rich landlords have the
ability to spend in comparison to poor farmers.
• There is change taking place in terms of habit,needs with t5he increase in literacy
rate and better communication technique.
• The product range of the companies are large.
• Substitute product and competition prevails in rural market Cost increases due
to handling, storage and transports.
12. Low Level of Literacy: Rural literacy rates are low as compared to the urban population.
In conveying message, to the rural people marketing planner put in special efforts. He has
to opt for the electronic media which is costly. If the village, is in interior part the larger
the problem of communication. In rural marketing, the advertisement hoardings have to be

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 colourful and use sign language with pictures to overcome barriers of low literacy in
villages.

17.8 Challenges before Rural Marketing

The peculiarities of the rural markets and rural consumers pose challenges to the marketers in
reaching them effectively. Rural marketing presents exciting challenges to the marketer, as people
in rural area has different social, cultural and psychological aspects with a traditional way of
living.
Many companies have been trying to get a grip on rural market. But challenges are many: how to
make the product reasonably priced how to enter villages with small populations, connectivity,
communications, language barriers, spurious brands, etc. Efforts are now on to understand the attitude
of rural consumers, and to do what they expect you to do i.e. walk their walk and talk their talk. The
marketing mix of many companies is now being tailored to rural tastes and lifestyles.

Some high lights on the challenges which marketers may face are as follows:

1. Distribution and Logistics: Infrastructure is the major area of concern in rural India.
Moreover, the lacks of well-organized distribution network do not allow penetration of
products/services into rural India. The most innovative way to reach rural people in recent
times has been the usage of the postal service by mobile operators to penetrate scratch
cards to the villages. The Indian Postal Service with 155000 post offices is the largest
distribution network, and has all of 120000 outlets in India’s villages. There are
intermediaries in some markets. There are direct deliveries in some commodities but
planning of package, storage and movement of agricultural goods is a challenging task for
marketers.

2. Inadequate Banking and Credit Facilities Most of the rural areas are still left out
without the banking facility. Clearly, non-cash collection is not possible as no banking
facility is there. Cash collections, are difficult on the other hand, and difficult.
The rural outlets require banking support to enable remittances, to get replenishment of
stocks, to facilitate credit transactions in general, so that they can obtain credit support
from the bank. Retailers are not capable of carrying most favorable stocks in the absence
of adequate credit facilities. It becomes a challenging situation for marketer as they are not
able to offer credit to the consumers. If they do not tap this untapped market other
marketers are furiously waiting to tap it as a major area of concern for marketers.

3. Pricing: It is a major challenge for a rural marketer pricing a product for low income
group by saving cost in packaging minimizing the advertisement expenses. While Sachet
pricing may have worked very well for Chik shampoo, but every marketer has to be very
cautious while pricing by keeping in mind the rural people which are very traditional in
nature. Disposable income, of rural people is not very high, so there is big question on
their buying costly product .As the major population of rural India is agricultural and
income cycles in agricultural are very erratic and not as predictable the affordability is low.

4. Village Structure in India: Rural India is scattered and is a challenge for a marketer to
reach their product in every corner of the world. The scattered nature of the villages
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 increases distribution costs, and their small size affects economic viability of establishing
distribution points. Add to that there is a greater difference in consumer tastes and behavior
across geographies than in the relatively more cosmopolitan urban population.

5. Different Way of Thinking: There is a huge difference in the lifestyles of the people in
rural and urban area. The choices of brands available to an urban customer are different
from the choices available to the rural customer. The rural customer usually has very few
brands to choose from whereas the urban one has multiple choices. The difference also lies
in the manner which they think. Thinking of rural customer is simple as compared to the
urban counterpart. Life in rural areas is still governed by customs and traditions and people
do not easily adopt new practices. Marketers sometimes fail to change thinking of rural
customer as they have a traditional way of thinking.

6. Promotion of Brands: Promotion of brands in rural markets requires the special

measures. As there is a social and backward condition in rural area the personal selling
efforts have a challenging role to play in this regard. The word of mouth is an important
message carrier in rural areas. The opinion leaders are the most influencing part of
promotion strategy of rural promotion efforts.

7. Packaging: If the packaging cost is high, it will increase the total cost of products. But,
sometime cheaper packing may damage the product For example, small polypack of
refined oil is more popular than in containers of the same product due to its lowest cost.
One more important factor is the size package e.g. the size of the package should be small
as the affordability of rural people is less.
Some other challenges
are  Low
Literacy.
• Communication Problems.
• Buying Decisions.
• Seasonal Demand.

17.9 Suggestions

The past practices of treating rural markets as similar of the urban market is not correct, since
rural markets have their own identity with large no rural customer, and if cultivated well could
turn into a generator of profit for the marketers. Some suggestion for tapping rural market is as
follows.

1. By Communicating and Changing Quality Perception: Companies are coming up with

new technology and they are correctly communicating it to the customer. There is wide
gap between Quality a customer perceives and a company wants to communicate. The
perception of the rural customer about the desired product is changing. Now they know the
difference between the products and the utilities derived out of it. Rural customer would
always look value for money.

2. By Communication in Language they Understand: The companies have realized the

significance of proper communication in local language for promoting their products.
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 Their main focus is to change the Indian customer outlook about quality. So that whatever
is sold by marketer gives value for money to rural customer.

3. By Understanding Cultural and Social Values: The Companies should know that social
and cultural values have a very strong hold on the people. Cultural values are important as
it plays a major role in deciding what to buy. Rural people are emotional and sensitive in
nature. Thus, marketers should promote their brands in an emotional way with a touch of
social values.
4. By Providing What Rural Customers Want: The customers want value for money? If
they purchase a product worth five rupees they would see that whether it is worth paying
or not. They intend to get the basic functionality from the product. However, if the seller
provides additional product free of cost they are happy with that.
5. By Promoting Products With Film Actors: The Companies should go for advertising
their product with film actors with whom they can associate very easily. For example
Shahrukh Khan is chosen as a brand ambassador for MNC quartz clock maker “OMEGA”
6. By Promoting Indian Sports Team: The Companies should promote their product
through Indian sports teams as whether it is rural or urban area cricket lovers are
everywhere. So, it would become easy for company to promote their product.
7. By Developing Rural-Specific Products: They should develop rural-specific products.
By keeping in mind the requirements, of rural customer.

8. By Sponsoring the Melas and Hats in a Significant Manner: This could increase the
chance of their product more vigilant.

17.10Summary

The rural market of India is attractive and challenging at the same time and offers large scope on
account of its large size and it is growing steadily. Even a small growth in rural market can push
up the sales of a product substantially, in view of the huge base despite the fact that there are
massive amount of problems. It is an attractive market the urban market is highly competitive and
saturated, the rural market is untapped.
Successful rural marketing calls for a review of the rural marketing environment, developing
proper understanding about rural consumers, designing the right products to appeal to them, and
adopting suitable media as well as appropriate strategies for communication and distribution.
The rural market is where the markets of the future are likely to be. Rural market is the market of
the new millennium. Marketers will have to understand the rural customers before they can enter
the rural markets. Companies need to understand rural marketing in a broader manner not only to
survive and grow in their business, but also as a means to the development in rural economy.
Rural marketing requires lot of time and requires considerable investments in terms of developing
appropriate strategies with a view to tackle the problems.
Moreover, every effort should be made by the companies to promote the “my brand” feel in the
minds of consumers they should connect themselves with the brand. This can be achieved by
connecting the local industries of that place and, if necessary, use it in packaging of the product.
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Thus looking at the opportunities which rural markets offer to the marketers it seems that the
future is very promising for those who can understand the dynamics of rural markets and exploit
them to their best advantage.

17.11 Self Assessment Questions

1. Define rural marketing. How will you add value to rural marketing?
2. Explain the factors, which have made rural markets attractive.
3. How does rural marketing differ from urban marketing?
4. What qualities should a rural marketer possess?
5. Provide suitable guidelines to companies planning to go rural.
6. Bring out the similarity between rural and urban market.
7. What are the main characteristics of rural marketing?
8. Outline the challenges faced by marketers in marketing product in rural area.
9 You have been hired by a company producing a complete range of consumer durables
goods. The company has decided to sell air cooler in the rural market. What strategy will
you use to communicate and convince rural people?

10 Comment upon the effectiveness of wall posters and announcement in crowded place
about the product as communication media in the rural markets, giving suitable
examples.

17.12Reference Books

 Velayudhan & Sridhar, (2009), ‘Marketing to Rural Consumers Understanding and

Tapping the Rural Market Potential’; Excel Books, New Delhi.

 R.V. Badi & N.V.Badi, (2006) ‘Rural Marketing’; Himalaya Publishing house, Mumbai.
 TP Gopalaswamy, (2005) ‘Rural Marketing Environment, Problems and Strategies’;
Vikas Publishing House ltd, Second edition ,New Delhi.

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